Demand slowdown, costly raw materials to hit local spinners: Icra survey

By: |
Chennai | December 18, 2019 3:03 PM

Some of the key reasons include weak export demand amid increasing competition from other producing countries and sluggishness in domestic consumption levels.

Domestic spinners’ performance in the first half of current fiscal (H1 FY2020) is expected to weigh on full year’s performance.

Domestic spinners’ performance in the first half of current fiscal (H1 FY2020) is expected to weigh on full year’s performance. Despite industry’s gradual recovery, most spinners expect revenues to fall by more than 5% and operating profitability to contract by around 3% for FY2020, said an Icra survey on Tuesday.

Though the industry is gradually recovering from the slowdown, the domestic spinners expect the overall FY2020 performance will be weighed down by the tepid volumes and weak earnings seen in the first half of the fiscal.

Some of the key reasons include weak export demand amid increasing competition from other producing countries and sluggishness in domestic consumption levels. Higher domestic raw material costs, with Indian cotton prices trading at a premium to international cotton also contributed to the loss of export competitiveness. Buoyed by the improvement in exports witnessed since October 2019, the survey indicates that the industry pins its hopes on a continued gradual recovery in cotton yarn exports over the coming quarters, aided by the softening of domestic cotton prices, Icra said.

The other survey findings include: the likelihood of cotton prices to remain below the minimum support price level till March 2020 on expectations of a bumper crop production in CY20; yarn prices and contribution levels to continue to tread lower than the FY2019 levels even though yarn prices have started moving up; increase in working capital debt levels by 15% y-o-y, reflecting the inventory build-up amid shortfall in earnings; and limited capacity additions are envisaged over the next 12 months.

While most industry participants expect operating profitability to contract by around 300 bps in the current fiscal, some respondents anticipate higher correction reflective of the difficult times being faced by the sector. The fall so far has been steeper for companies which had stocked and carried over higher-cost cotton (at around Rs. 130/kg) into the current fiscal.

While the domestic cotton prices have reduced from July 2019, the decline in yarn prices has been sharper, resulting in contribution levels adjusted for cotton stock held falling to around Rs. 75/kg in Q2 FY2020. Even though yarn realisations have improved in recent weeks, the respondents do not expect any major uptick in yarn prices, given the low cotton prices witnessed as the industry expects the crop output in the current season to be healthy at more than 375 lakh bales.

According to the survey, cotton and yarn prices are likely to remain range-bound at around Rs. 110-115/kg and Rs. 195-205/kg, respectively in H2 FY2020. As a result, the spinners expect average contribution levels for the fiscal to be at Rs. 80/kg (with contribution likely to improve to around Rs. 82-85/kg in H2 FY2020 as against FY2019 levels of Rs. 95/kg).

The survey findings also highlight that the working-capital debt levels of spinners have increased, because of a pile-up in yarn stocks and some elongation in the receivables cycle owing to the tepid demand conditions. Respondents expect average utilisation of fund-based limits to be at around 90% in FY2020, higher from the 75% levels seen in the last fiscal. On the back of these adverse developments, coupled with average capacity utilisation levels in the industry falling by around 500 bps to 82% in H1 FY2020, a vast majority of the respondents have indicated that no capacity expansion is being planned over the next 12 months.

Jayanta Roy, senior vice-president and group head, corporate sector ratings, Icra, said: “The Indian cotton spinning industry’s performance has been severely constrained in the current fiscal, being adversely impacted by the demand slowdown, unfavourable raw material prices and rising funding requirements. While export volumes have seen some uptick in recent months, as against the sharp degrowth witnessed between May-September 2019, they remain lower than the levels seen in the preceding fiscal.”

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