By Nayan Dave
Spinning units across the country are not likely to get respite till the arrival of the new cotton season in October this year, as increased cotton prices will continue to stress working capital and liquidity of yarn spinners, especially small-sized ones, said the latest report of Mumbai-headquartered credit rating agency India Ratings and Research (Ind-Ra).
As per the report, inflated prices of cotton may lead to lower capacity utilisation of small-sized spinners during 1HFY23. However, an operational recovery is expected by 2HFY23, on the back of a likely correction in cotton prices with the arrival of the new cotton season in October 2022, claimed the report. Cotton production could be higher in the new cotton season compared to the current season, says Barath Ramjee, Ind-Ra director (emerging corporate), adding, “While the duty-free import of cotton and arrival of summer cotton are likely to support the moderation in the domestic cotton prices in the short to medium term, a decline is expected in cotton yarn prices in tandem with cotton prices. This could benefit apparels and textile players, who are already facing challenges to pass on raw material price inflation to consumers.”
In the beginning of the current cotton season, Cotton Corporation of India (CCI) had 12.5 million bales (170 kg per bale) of cotton. At present, CCI has less than 4 million bales, he said. Agreeing with the Ind-Ra report, S Jagadesh Chandran, secretary of the South India Spinners Association (SISPA), said that most of the spinning units in South India are operating at hardly 50-60% capacities due to increased prices of cotton and other inputs. “Small-sized spinners are facing the challenges of liquidity crunch and issues of availability of working capital in the wake of increased production cost. At the same time, their buyers are not willing to pay price hikes in proportion with the inflated input costs,” lamented the SISPA secretary.
Of the over 3,000 spinning units across the country, nearly 70% are situated in South Indian states. Of these, nearly 10% are almost closed. Similarly, Gujarat-based spinning units are also operating at less than 50% capacity on an average. Gautam Dhamsania, secretary, Spinners Association – Gujarat (SAG) says that nearly 10% of 120-odd mills have closed operations, and most others are struggling to survive in the wake of increased input costs.
Cotton prices started moving upwards post-pandemic, not only domestically but also globally on account of the US ban on the use of Xinjiang-region cotton, followed by a low crop yield in India, says Nithyashree B, senior research associate, Ind-Ra. As per CCI, cotton production of the current season (Oct 2021-September 2022) is expected to remain at 32.36 million bales.
“On a monthly average, in May 2022, the price of Shankar-6 Guj cotton grew 113% year-on-year (y-o-y) to around Rs 99,786 per candy (356 kg per candy), whereas yarn prices increased only 45% y-o-y. The substantial hike in cotton prices has increased working capital requirements for cotton yarn manufacturers, especially small-sized entities,” she said. According to her, the margins of small entities will decline significantly, whereas medium and large sized entities are likely to record a moderate decline in 1HFY23.
Large players could continue to witness resilience in the margins on account of a high value-added product portfolio, control on power cost, benefits from economies of scale, availability of easy financing, etc, she added. “The aggregate average inventory-holding period fell in FY22 to 98 days from 127 days in FY21, owing to the higher cotton prices which led reduced stock holding. The total cotton stock with mills decreased around 17.8% y-o-y to 1,326 million kg in FY22,” says that report.