In spinning segment, margins could be under pressure for the rest of FY20, owing to the impact of volatility in fibre prices despite a gradual improvement in export demand.
The margins of cotton textiles are expected to improve in the coming period, however, it will be volatile for man-made fibres, says a study by India Ratings and Research (Ind-Ra).
Cotton prices had declined in November 2019, however, December 2019 marked the beginning of an upward movement in prices by 2-3% year-on-year. While the arrival of cotton during Q1 of the current season (October-September 2019) as expected by CCI would improve by 8.5% year-on-year, the impact on actual prices is not visible.
The agency expects cotton prices to soften till March 2020 due to better yield, leading to higher productivity of cotton in the current season, the study said. The Cotton Corporation of India (CCI) has maintained its forecast for cotton production at 35.4 million bales during the current season.
Further, the yield per hectare is expected to improve by more than 6% over the previous season due to a higher acreage and better monsoon.
In November 2019, cotton yarn exports improved 15% month-on-month, but fell 5% year-on-year. Demand from China, Egypt and Bangladesh increased during the month. However, due to the US-China trade war, exports to China are still around 50% of the November 2018 levels.
According to the study, cotton yarn production fell 10% year-on-year in November 2019. Meanwhile, the share of exports in the total production increased to 30% in November 2019 from 25% in October 2019, supported by increased demand from the top two importers (China and Bangladesh).
The first phase of US-China trade negotiations concluded in December 2019 could underpin China import demand in 2020.
Demand for fabric exports has contracted, owing to weak market sentiments and increased competition from South-East Asian countries. Fabric exports fell 12% year-on-year in November 2019 and improved 12% year-on-year.
Crude oil prices could remain volatile in the short-run owing to geopolitical tensions and production cuts by Opec, which impacts the man-made textile margins. Man-made fibres saw the third consecutive month of low volatility, until November 2019, of raw material prices on the back of stable crude oil prices, which has helped the segment maintain stable Ebitda margins and improve credit metrics.
In spinning segment, margins could be under pressure for the rest of FY20, owing to the impact of volatility in fibre prices despite a gradual improvement in export demand. While the margins for 2HFY20 may recover over 1HFY20, liquidity will be under pressure for mill owners, the Ind-Ra study said further.
Home textiles continue to be better placed as compared to other textile sub-sectors. For FY20, the agency expects credit metrics to be maintained owing to margins stabilising at 18-20% with softness in cotton prices. The performance (credit metrics) of India Ratings peer set home textiles moderated in 2QFY20, with an overall improvement in 1HFY20 over 1HFY19.