Margins of textile mills buoyed by cotton price fall, but hurdles lie ahead

Cotton prices in major producing centres such as Punjab and Madhya Pradesh have declined to nearly 10% below the government's MSP

The profit margins of textile mills improved during the second quarter (July-September) of the current financial year. Input costs were low, driven largely by a fall in cotton prices. 

Leading players Welspun India, Trident and Vardhman Acrylic reported emphatic growth in turnover and net profit, as did Raymond and Surat Textiles.

Welspun India, for example, posted a 21.4 per cent growth in net profit to around Rs 1.217 billion over the same period last year. Sales grew 11 per cent to Rs 17.8 billion.  

"Raymond's overall performance was above our expectations, driven by broad-based growth across divisions. Sales increased 16 per cent, Ebitda (operating earnings) by 36 per cent and net profit by 63 per cent, above our expectations. Management commentary was cautious on Q3 growth trends but it expects growth to improve from Q4, due to the wedding season. While Raymond has maintained its 100 basis points (bps) margin expansion guidance (estimate) for the year, we believe that upsides are likely, given the 190 bps margin expansion in the first half. Better capacity utilisation in garmenting, higher gains from currency depreciation and continued focus on efficiencies should drive margin expansion in the second half," says Ashit Desai, an analyst with Emkay Global.

These dynamics might change in the coming quarters with demand for cotton coming from Pakistan, China and other importing countries at a time when the domestic natural fibre output is estimated to decline. As against the earlier forecast of 36 million bales (a bale is 170 kg) of output, traders and industry experts now estimate cotton output at 33-33.5 million bales this year. 
 

"Raw material prices remained subdued during the quarter, though cotton demand from domestic textile manufacturers was robust, as mills needed to prepare stocks for the festival and seasonal demand in October-November," said Ajay Kedia, managing director, Kedia Stocks and Commodity Research.

Cotton prices in major producing centres such as Punjab and Madhya Pradesh have declined to nearly 10 per cent below the government's minimum support price of Rs 5,450 a quintal (of long staple). In August, these had fallen to Rs 4,300 a quintal. At present, it is Rs 4,600 a quintal at spot markets in Gujarat.   

China has since turned to India for import of cotton due to a higher import duty levied on its traditional supplier, America. Pakistan is also likely to procure from India this year.  

"Cotton farmers in Maharashtra and Gujarat are facing a double whammy. While a drought has reduced the output potential, pink bollworm attack has further lowered production possibilities. This has come when demand from China and Pakistan has suddenly emerged. Overall, Pakistan is looking a better and sustainable market for India than China," said a city-based cotton exporter. 
 

Meanwhile, a recent report from India Ratings forecasts robust demand for textiles from end-users in India, supported by a strong rise in private consumption expenditure during the rest of this financial year. Also, apparel export is likely to rise, with the rupee's fall against the dollar at a higher rate over April-August than the currencies of other key exporting nations.  

The rising dollar has also lowered the potential for cotton import into India, as imported cotton would now become costlier than domestically available fibre.