High cotton prices, low consumption growth and weak export prospects entangle spinning industry. As per a research by ICRA, the independent and professional investment information and credit rating agency, cotton availability in the country is likely to remain tight in 2017 while prices would remain higher on a y-o-y basis during FY2017.

Historically, high cotton price has not benefited the cotton spinning industry as it impacts demand, reduces competitiveness, and increases risk of inventory losses besides resulting in need for higher funding requirements. Given the tight opening stock position and unlikely increase in cotton crop size, cotton export levels will determine the domestic cotton availability and prices in H1 FY18. The pressure on yarn exports and tepid domestic consumption remain a challenge for the Indian spinning industry.

During FY16, growth in domestic yarn consumption stood at the lowest in four years (0.8 per cent for cotton spun yarn and 2.5 per cent for total spun yarn) while the spun yarn production remained flat in Q1 FY17 a y-o-y basis. Given the lukewarm domestic consumption and weak prospects of textile exports, demand for yarn is unlikely to get any support. Thus, spinners will need to sacrifice profitability to maintain capacity utilisation.

Commenting on the financial health of Indian spinning industry, ICRA stated that apart from profitability pressures, high cotton prices will translate into higher working capital requirements and hence, borrowings and will translate into weaker credit metrics. ICRA cuts the outlook of Indian cotton spinning industry from stable to negative.

While profitability is expected to come under pressure, ICRA notes that some of the stronger players, who had stocked cotton prior to increase in cotton prices, may witness improved profitability driven by inventory gains during Q2 FY2017. This is definitely a negative sign, it is believed.