Kolkata: The surge in export demand for cotton yarn over the past few months has come as a major respite for the domestic spinners, who had reported a multi-year low profitability during FY2018 amid multiple headwinds. Even though the pace of growth is likely to moderate during the year with the base effect setting in, India is set to record strong growth in cotton yarn exports during FY2019, according to an ICRA report released on Monday.
Commenting on the emerging trends, Mr. Jayanta Roy, Senior Vice-President and Group Head, Corporate Sector Ratings, ICRA, says, “Even though trends in domestic consumption of cotton yarn remain unencouraging, strong revival in export demand augurs well for profitability of domestic spinners as it has enabled them to pass on the increase in raw material costs, unlike last year. This together with access to low-cost cotton from the previous harvest season has helped the domestic spinners maintain the improvement trajectory in profitability in H1 FY2019.”
The revival in export demand has enabled ICRA’s sample of large spinning companies report a comfortable volumetric growth of 5% Y-o-Y in Q1 FY2019, which together with a 7% Y-o-Y increase in average yarn realisations to Rs. 211/kg has translated into a growth of ~12% in sales turnover during the quarter. The growth rate appears comfortable, when viewed in comparison to a growth of 5-6% reported by the sample during FY2017 and FY2018 amid multiple demand-side pressures. The aggregate operating margins also improved to 12.2% in Q1 FY2019 vis-a-vis 11.6% in Q4 FY2018, after having remained subdued at 9-11% during the preceding four quarters. As a result, the aggregate interest cover improved to 3.8x in Q1 FY2019 from 3.1x in Q1 FY2018, despite an increase in interest outgo due to an increase in the inventory-led working capital requirements.
With increased demand, the Indian cotton prices increased by ~9% in the month of June 2018 and stayed firm thereafter, before correcting marginally in September 2018 with the onset of the harvest season. As a result, the spread between the domestic and international cotton prices narrowed significantly and is estimated at ~8% for the quarter-ended September 2018.
“Notwithstanding the healthy demand prospects in the export markets in the near term, considering the still higher-than-usual spread levels, the spike in growth rate of exports witnessed is likely to moderate during H2 FY2019 with the arbitrage opportunity as well as the base effect fading out,” Mr. Roy added.
Other factors apart, competitive pressures from Vietnam and China’s focus on improving cotton availability situation, are also expected to moderate the export demand for India’s cotton yarn going forward. Nevertheless, given the strong growth reported during four months of FY2019, cotton yarn exports for the full year are expected to report a healthy growth in FY2019.
