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Pressure on Indian spinners’ margins may ease

For the fourth consecutive quarter companies in India’s spinning sector have reported a year-on-year decline in volumes.

Reasons include a fall in exports due to weak demand from one of the key markets, China; and a focus on inventory clearance prior to GST implementation, which affected offtake and hence production volumes.

The challenges have been further accentuated by consistently firm cotton fiber prices resulting in subdued contribution margins as well as strengthening of the Indian currency vis-a-vis currencies of competing nations, thereby affecting realisations.

Nevertheless the debt coverage metrics continue to improve on a year on year basis, given the secular decline in term debt level and decline in borrowing costs. Improved supply of cotton fiber is, however, expected to provide some respite to domestic spinners during the second half of fiscal year 2018.

The level of global cotton production in 2018 is estimated to exceed consumption, after two consecutive years of shortfall. The resultant cotton surplus therefore will create a downward bias in prices which, besides easing pressure on contribution margins of the spinners, is likely to bring down their working capital requirements. This augurs well for the domestic cotton spinning industry.

Further, Indian yarn exporters are trying to diversify export markets to increase their sales volumes.