Weak exports, uncompetitive prices to hit cotton spinners, says report

By: |
Published: August 20, 2019 1:32:17 AM

With India exporting roughly one-third of its cotton yarn production every year, trends in export demand play a crucial role in determining the overall performance of the domestic spinning sector. 

Weak export, cotton spinner, economy news, export, import, cotton, cotton yarn export, cotton yarn, domestic marketIndia’s cotton yarn export quantity declined by 33% y-o-y in Q1FY20 and stood at a seven-year low of 59 million kg in June 2019.

Weak export demand and uncompetitive prices are expected to hit the performance of domestic cotton spinners in FY20, following a brief recovery in FY19, a report said.  The degrowth in volumes due to lower export demand and a sharper decline in realisations vis-a-vis cotton prices because of higher minimum support price (MSP)-led floor price for the crop are expected to result in a decline in turnover and an estimated 100-150 bps compression in operating profitability of domestic cotton spinners during FY20, said an Icra report.

A large proportion of spinners have not undertaken capacity expansions in the recent years, given the unencouraging demand trends during this period, coupled with the discontinuance of subsidy benefits under the Technology Upgradation Fund Scheme (TUFS) for the spinning segment. This has resulted in a consistent decline in term borrowings for such companies in recent years with scheduled debt repayments, due to which the impact on their debt coverage metrics and liquidity could be lower, despite industry pressures.

With India exporting roughly one-third of its cotton yarn production every year, trends in export demand play a crucial role in determining the overall performance of the domestic spinning sector.

India’s cotton yarn export quantity declined by 33% y-o-y in Q1FY20 (41% in May and June 2019) and stood at a seven-year low of 59 million kg in June 2019. As a result, multiple textile associations across the country have reported stock pile-ups and production cuts by spinning mills in recent months. Whereas markets other than China, which has been the largest cotton yarn market for India, had supported the demand during FY17 and FY18 when exports to China fell, the pressure is more broad-based now.

Compared to a 50% y-o-y decline in cotton yarn exports to China during Q1FY20, exports to other markets too declined by 20%, the report said. Jayanta Roy, senior vice-president and group head, Corporate Sector Ratings, Icra, said, “Based on the emerging trends, we have revised the credit outlook on the Indian cotton spinning industry to ‘Negative’, as the profitability and debt coverage metrics are expected to moderate from the current levels. The impact is likely to be more pronounced for leveraged companies, that have undertaken a sizeable debt-funded capital expansion in the recent years and have higher repayments scheduled in the near term.”

“The pressure is primarily originating from higher cotton prices in the domestic market, which has made Indian yarn manufacturers uncompetitive in the international markets. As a result, the near-term outlook on Indian cotton yarn exports is quite weak at present,” Roy added.

Do you know What is Wholesale Price Index (WPI), Public Debt, Finance Commission Grants & Other Transfers, Economic Survey, State Finance Commission? FE Knowledge Desk explains each of these and more in detail at Financial Express Explained. Also get Live BSE/NSE Stock Prices, latest NAV of Mutual Funds, Best equity funds, Top Gainers, Top Losers on Financial Express. Don’t forget to try our free Income Tax Calculator tool.