With margins squeezed in the past couple of quarters owing to dwindling yarn exports and excess spinning capacity the cotton yarn industry is pinning its hopes on a fall in raw material (cotton) prices. Cotton spinners pin hopes on demand uptick to improve margins. According to CRISIL, among other issues, disruptions stemming from the roll-out of the GST took a toll on margins.
Yarn spinners say, margins were hit when the price of cotton went up, leading to lower demand from fabric and garment manufacturers, as well as dwindling yarn exports. They are hoping margins will improve in the last quarter of the current fiscal year on the back of an uptick in demand and improved yarn exports. However, in the interim, the industry is also expected to see a bumper crop, which could bring down cotton prices to some extent.
According to CRISIL, margins fell to a 20-quarter low in the second quarter of 2017-18.It further stated that the second quarter of fiscal 2018 was the least profitable in five years for spinners, or cotton yarn mills. Spinning units such as Chiripal Group and Balkrishna Textiles are hoping increased arrivals might bring down cotton prices.
Crisil has pointed towards a sharp increase in cotton production, expected at 37.5 million bales, in cotton season (CS) 2017-18 which would be a shot in the arm for spinners in the last two quarters of this fiscal year. It could frustrate further drop in margins. Also, demand normalisation after demonetisation and goods and services tax- or GST-led disruptions would improve utilisation.
However, the research firm is of the view that the Ebitda margin profile is different for large organised players owing to efficient procurement practices as well as benefits accruing from economies of scale.