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| Firm cotton puts denim makers' margins under pressure |
| Vinay Umarji & Kalpesh Damor / Mumbai/ Ahmedabad May 21, 2010, 00:01 IST |
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Denim makers seem to be finally feeling the pinch of spiralling cost of cotton, be it medium staple or short staple. Higher input costs resulting from firm cotton prices have put denim companies' margins under pressure as they are unable to pass on the burden to consumers at one go. Denim makers have raised prices by 10-15 per cent since beginning of April.
Denim companies mainly use short staple cotton (fibre length of 12mm to 24mm) for manufacturing denim fabric and this raw material accounts for around 50 per cent of their input cost. The prices of short staple cotton variety Kalyan V-797 have surged by nearly 25 per cent to a level of Rs 21,000 per candy (356 kg) from Rs 17,000 per candy at the onset of the current season.
"The input cost has increased by 12-15 per cent following rise in raw material and it will have its impact on the profitability," says Vinod Arora, chairman, Aarvee Denims and Exports Ltd.
Seconding his thoughts is Jayesh Shah, chief financial officer of Arvind Ltd, "There is a strong demand for denim. However, due to unprecedented rise in cotton and even much higher increase in yarn prices, the margins are under pressure," Shah adds.
Leading denim companies such as Aarvee, KG Denim, Nandan Exim, Jindal Worldwide have not been able to fully pass on the burden of higher input cost to fabric buyers.
For instance, KG Denim, which manufactures around 20 million metres of denim per annum, is sandwiched between keeping its fabric buyers happy as well as curbing its rising input costs. While it could ward off the impact of rising input costs by hiking fabric prices by 15-20 per cent, it still ended up losing margins by 10 per cent.
Most of the denim producers have hiked prices of denim fabric to absorb escalating input costs due to firm cotton prices. "Denim fabric prices have increased to Rs 93-95 per meter from Rs 84-86 per meter depending upon the quality," adds Aarvee Denims' chairman.
Similarly, KG Denim has hiked fabric prices from Rs 90-100 to Rs 110-115 per metre in last one month. However, such a step is too risky to be repeated. "There is no way that buyers will take another series of price hike in denim fabrics. The industry, including KG Denim, could hike fabric prices by anywhere between 15 per cent and 25 per cent. Yet, cotton and cotton yarn prices have risen by 25 per cent and 30-35 per cent, respectively in the last two quarters. And it still leaves about 10 per cent of additional input costs that are being absorbed at the cost of margins," says a source at KG Denim.
With China's cotton crop getting damaged and Pakistan imposing a 15 per cent duty on cotton exports, the domestic cotton and yarn producers are making the most of it. Moreover, domestic as well as international fabric buyers or garment makers are not confident that full burden will be digested by the end consumers.
"Fabric buyers are reluctant to increase prices of end products. If denim makers force them to accept bigger price hike, they may even look for other options in other countries which could be detrimental for Indian denim fabric makers. Therefore, on an average, denim makers are taking a 10 per cent hit on their margins. If prices of cotton and cotton yarn continue to increase, it could further damage the sales," says Deepak Chiripal, chief executive officer of Nandan Exim, the denim subsidiary of Ahmedabad-based Chiripal Group.
According to Chiripal, the impact on margins is higher for those denim fabric manufacturers who buy cotton yarn instead of producing themselves. A case in point is KG Denim which sources about 800 tonne of cotton yarn per month, of which 100-120 tonnes used to be from Pakistan. "Producing cotton yarn through captive spinning mills helps reduce input costs to some extent. While KG Denim does have its own spinning mills, most of the yarn is either imported from Pakistan or sourced from domestic suppliers. The recent decision to impose 15 per cent duty on cotton exports by Pakistan has forced the company to shift major sourcing to cotton yarn producers in India which has added to the woes," the source adds.
Meanwhile, experts believe high cotton and yarn prices are here to stay for sometime. "In the coming months, cotton and yarn prices may remain high. They may not go down or go exceptionally up but will remain high for sometime. However, good sales in volumes may help denim makers lessen the impact on margins," says PR Roy, management consultant (textiles) and director, fibre2fashion.
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