A recently released study from Crisil Research estimates that high raw materials costs will be taking a 2.5 percent bite out of the operating margins of spinners in 2011/12. Although some believe that the costs of buying cotton could increase by as much as 35 percent over the already-high costs, textile companies are expected to pass those expenses down the supply chain.

Crisil Research--one of India’s top rating, research, risk and policy advisory companies--says that rising cotton imports from China and a cap on Indian cotton exports are the main factors driving up global cotton prices.

"So far, strong demand has enabled spinning companies to pass on the increase in cotton prices to buyers,” says Sridhar C, Head of CRISIL Research. “Cash accruals for players have, therefore, jumped by more than 65 percent year on year in 2010-11. Spinners, however, will not be able to increase prices significantly in the coming months, as downstream fabric and garmenting companies would find it difficult to get similar increases from their consumers. This would impact profitability.”

India’s domestic prices are likely to soften as the year progresses, since exporters have exhausted their quota and global prices are projected to decline. In addition, yarn prices aren’t expected to rise by more than 20 percent as stocks build up due to underwhelming demand.