Firm cotton prices get the fluff out of yarn spinners

Analysts see inflated prices continuing to haunt small-sized spinners’ stocks in H1FY23

The double whammy of increased freight expenses and higher inflation has seen cotton prices rising over 30 per cent to ~46,700 per bale from ~35,829 in calendar year 2022 (CY22). This, according to analysts, is slowly eating into the margin and volume growth of the home-grown textile industry.

Moreover, with rising interest rates shackling the purchasing power of consumers, analysts expect muted demand for their products in the near term.

India is the second-largest producer of cotton, after China, with 25 per cent share of overall production. In the past few months, the global demand has shifted from China due to a ban on cotton cultivated in the Xinjiang region.

With a change in global supply-chain patterns, demand of this highly soughtafter commodity has multiplied, inflating its prices.

The rise in yarn and fabric prices, together with the international market, has led to a halt in local spinning mills.

According to a report by India Ratings & Research, nearly 10 per cent of the 2,100 spinning units across the southern parts of

India are shut since they cannot afford indigenously produced cotton. Likewise, Gujarat- and Ludhiana-based spinning mills are also operating at less than 50 per cent capacity on average, suggest reports.

Analysts expect inflated cotton prices to continue to haunt small-sized yarn spinners during the first half of 2022-23 (FY23). However, a correction in cotton prices after a good monsoon can weave a different story for yarn spinners in the second half of FY23.

“We expect domestic cotton prices to cool off after a good monsoon season. However, the nearterm is likely to be volatile for the cotton textile industry,” says Gaurang Shah, head investment strategist, Geojit Financial Services.

Moreover, monsoon’s slow start has led to an 8 per cent decline in the cultivation area of kharif crops this season over the same period last year.

The forecast of lower crop yield due to delayed monsoon has forced the Cotton Association of India to trim its estimates for cotton crop output for the current season to 31.53 million bales (of 170 kilograms each) — a reduction of 831,000 bales from its previous estimate.

Dark clouds over textile companies notwithstanding, analysts at ICICI Securities expect companies with stronger balance sheets and comfortable liquidity position to ride out the storm.

A K Prabhakar, head of research, IDBI Capital, too, believes that companies with healthy inventory levels can soldier on.

“Among textile companies, we expect KPR Mill (formerly KPR Cotton Mills) to perform well because it was able to procure cotton inventory at the right time. However, Welspun is likely to widen losses due to untimely procurement,” adds Prabhakar.

In a bid to cool off prices of cotton and lift domestic demand, the government has increased the minimum support price (MSP) of kharif crops, with the MSP of cotton up 6.18 per cent to ~6,080 per quintal and restricted exports unless domestic demand is met.

Despite the government’s concerted efforts, analysts remain circumspect on margin pressure looming over the textile industry as companies hesitate to pass on complete price hikes to consumers.

“Although the government’s increased MSP support to cotton prices can offer some relief to farmers, the quantum of cost passed on by textile companies to consumers has to be observed,” adds Shah.

Meanwhile, the stocks of cotton yarn spinning mills have been under pressure in CY22.

KPR Mill, Ambika Cotton Mills, Trident, Nahar Spinning Mills, Nitin Spinners, Vardhman Textiles, and Lakshmi Mills have slipped between 14 per cent and 46 per cent thus far in CY22.

In comparison, the S&P BSE Sensex shed over 11 per cent during the same period, reveals ACE Equity data.

With a change in global supplychain patterns and an upswing for this highly sought-after commodity, Indian yarn spinners’ capacities have multiplied, consequently inflating prices