High inventory cost hits bottomline of textile cos

A fluctuating cotton and other raw material costs seem to have taken a toll on bottomline of textile companies for the first quarter. Companies like Aarvee Denim and Century Textiles have posted a dip in net profits for quarter ended June 30, 2011.

For instance, from a net profit of Rs 8.08 crore for the first quarter ended June 30 last year, Ahmedabad-based denim major Aarvee Denim and Exports Ltd. has posted a profit after tax of Rs 3.39 crore, registering a dip in bottomline of about 58 per cent. Similarly, Century Textiles and Industries Ltd. has posted a net profit of Rs 23.9 crore for the quarter ended June 30, 2011 as compared to Rs 100.43 crore for the quarter ended June 30, 2010.

"Raw materials have risen in the recent past, especially in terms of cotton. We have been running on high cost inventory since sometime. This has led to pressure on our bottomline. What's more, even the second quarter looks difficult because we still have a high cost inventory," says Utsav Pandva, chief financial officer of Aarvee Denim and Exports Ltd.

For Century Textiles and Industries Ltd., while its overall net profit has dipped by 76 per cent, the company's textile segment has incurred a loss of Rs 11.86 crore for the quarter ended June 30 2011. The company has undertaken expansion activity in production of viscose filament yarn.

"The process of installation of 12 machines for production of viscose filament yarn is in progress in order to increase the production capacity of viscose filament yarn by about 5 per cent per annum. Further, two existing electrolyzers are being replaced by an energy efficient electrolyzer in the caustic soda plant. These improvements involve capital expenditure of Rs 50 crore and are expected to be completed before December 2011," the company said in an official statement.

Meanwhile, Alok Industries has registered a net profit growth of mere 24 per cent for the first quarter ended June 30, 2011 at Rs 57.77 crore, up from Rs 46.51 crore for the corresponding period last year.

Talking about high cost inventory, Dilip Jiwrajka, managing director of Alok Industries Ltd. said, "We have made a conscious decision to keep our cotton inventory low because of high prices. We now have a less than 30 days inventory and run 'hand-to-mouth' as far as cotton is concerned. This has insulated us from constant fluctuations in cotton prices."

On its part, Aarvee Denim still has an inventory of nine million kg of cotton meant for 4-5 months.