High capacity utilization, sustained exports and stable outlook on cotton prices augurs well for Spinning industry: ICRA   

The outlook on the Indian spinning industry remains Stable with expectation of improved performance in FY 2016; however sustained yarn exports remain key sensitivity – says

ICRA in its latest research update on the Indian spinning industry.

According to ICRA research, the performance of the industry is expected to improve in FY 2016 on account of satisfactory export demand which continues to support healthy capacity utilization of the domestic spinning mills and limited risk of inventory loss due to cotton price movements, driven by expectation of adequate availability of cotton in CY 2015/16.

In ICRA’s view, while the export demand in H1 FY 2016 may be lower as compared to H2 FY 2015, the yarn exports for FY 2016 are expected to be at similar levels as that in FY 2015 on account of continued dependence of China on imports to meet its requirements.

Moreover, the higher depreciation of Indian Rupee as compared to Pakistan’s and Vietnam’s currency will also support yarn exports from India, given that these are the two main competitors in cotton yarn exports.

As per ICRA research, though the yarn production is increasing driven by increased capacity, satisfactory export demand coupled with the steady domestic consumption is expected to result in healthy capacity utilization of the spinning mills. As a result, despite expectation of lower contribution margin1 in FY 2016; higher production volumes will lead to better economies of scale and improved operating profit margins in FY 2016.

Improved operating profit margins coupled with expectation of limited increase in inventory levels and range-bound cotton and yarn prices will keep the working capital requirement at similar level as that in FY 2015, which shall result in improved financial performance of the spinning mills in FY 2016.

ICRA highlights that the above assumption is contingent upon sustained export demand, given the high export dependence of the domestic spinning industry. Any decline in the 1 Cotton yarn price less cotton price export demand will result in shift of the export supply to the domestic market, which will impact the utilization levels and profit margins of the spinning mills.

As per ICRA research, the domestic cotton availability in CY 2015/16 is expected to be better as compared to the previous year due to limited exports and thus the domestic cotton prices may again fall below the Minimum Support Price (MSP). This may require significant MSP operations by Cotton Corporation of India (CCI) for the second consecutive year which is likely to maintain the domestic cotton prices around the MSP

during CY 2015/16 as well.