The surge in export demand for cotton yarn during the initial few months of
the current financial year has helped the domestic spinners record a healthy
recovery from the multi-year low profitability reported during FY2018 amid
multiple headwinds, according to an Icra report released on Monday.
Even though exports have started to normalise and cotton prices have
softened with fresh arrivals in the recent months (though still higher vis-avis
last year), cotton yarn realisations have exhibited stickiness which,
together with movement in cotton yarn stock levels, point towards a pick-up
in domestic demand.
Moreover, notwithstanding the moderation in Y-o-Y growth in cotton yarn
exports in the recent months, trend in absolute exports remains healthy.
Commenting on the emerging trends, Mr. Jayanta Roy, Senior VicePresident
and Group Head, Corporate Sector Ratings, ICRA, says, “Healthy
demand and higher cotton fibre prices (vis-a-vis last year) have shifted
cotton yarn realisations into a higher trajectory this year, with realisations
averaging ~13% higher vis-a-vis an 11% increase in cotton fibre prices from
last year.
Additional benefits of lower cost cotton stocked during the last harvest
season has helped in placing the recent performance ..
Notwithstanding the volatility in Indian rupee against the US dollar during
the current year, the sharp rupee depreciation between July and October
2018 also supported spinners’ INR realisations and hence contribution
margins.
The aggregate operating margins of ICRA’s sample of 13 large spinning
companies improved to two-year high of 13.7% in Q2 FY2019 vis-a-vis 12.2%
in Q1 FY2019, after remaining subdued at 9-11% during the preceding five
quarters.
On an absolute basis, the aggregate operating profit of ICRA’s sample in Q2
FY2019 stood at five-year high level, with 59% Y-o-Y growth and 9% Q-o-Q
growth.
After growing at a strong pace of 50% Y-o-Y during 5M FY2019, India’s
cotton yarn exports normalised in the subsequent months of September and
October 2018, reporting a moderation in growth to 34% Y-o-Y in 7M FY2019.
The growth initially had been driven by a more than two-fold increase in
exports to China - one of India’s key markets for cotton yarn. Besides a low
base effect, the staggering growth in exports was supported by the relative
competitiveness of Indian cotton and yarn prices, providi ..
“Despite exports retreating to normal levels in the recent months in absolute
terms, ICRA expects the annual growth in India’s cotton yarn exports to
remain healthy at ~18-20% during FY2019 supported by a strong YoY
growth of ~34% in 7M FY2019.” Mr. Roy added.
A more than 90% growth in India’s cotton yarn exports to China during 7M
FY2019 also helped Indian spinners claw back a part of the export market
lost to competing nations such as Vietnam over the past few years.
However, sustainability of India’s cotton yarn exports remains to be seen,
given the correction in spread between domestic and international cotton
prices to ~8% in the quarter ended Dec 2018 from ~16% in the quarter ended
Jun 2018 and continued competitive pressures from Vietnam.
Given India’s continued high dependence on China, its ability to strengthen
its presence in other export markets remains crucial.
Besides, incremental developments on the US-China trade row can play a key
role in influencing India’s export prospects, as China has a significant
reliance on the US for import of cotton fibre.
Source: The Economic Times, India Wednesday, 16 January 2019