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Spinners bank on healthy cotton crop/demand and recovery: ICRA forecasts

As per a recent report by ICRA, domestic spinners are likely to see a gradual recovery in performance from Q4 FY2018 onwards, after facing multiple issues over past several quarters which resulted in their profitability touching six-year lows in the second and third quarters of current fiscal.

Mr. Jayanta Roy, Senior Vice-President and Group Head, Corporate Sector Ratings, ICRA avers, “The improvement in performance of domestic spinners is likely to be aided by a downward bias in cotton prices amid healthy cotton crop and an upward bias in yarn realisations due to demand restoration. While there has been an uptick in cotton prices in the recent weeks, ICRA believes the same to be an aberration in light of slower-than-usual arrivals in the leading cotton producing state of Gujarat owing to elections and concerns emanating from reports of pest attacks.”

ICRA believes that the crop quantity and quality is unlikely to be impacted seriously because of the issues mentioned above and arrivals are forecast to pick up in Q4 FY2018. So, domestic prices are likely to remain ~10-12 per cent lower than average cotton price during the twelve month period ending Sep 2017, close to the price floor of Rs. 105/Kg which factors in increased minimum support price and bonus declared in Gujarat.

“The scenario on demand front is also likely to be more conducive, supported by improved clarity on export incentives for textile goods during recent weeks, which in-turn is likely to support India’s overall textile exports from Q4 FY2018 onwards. With improved demand scenario, the yarn realisations are likely to witness some upward bias, though the increase will be limited due to low cotton price,” Royadded.

The clarity on export incentives, which had been revised downwards post-GST created a transitory impact, is good for cotton yarn demand from export-oriented textile players in the downstream sectors and hence is likely to support demand restoration to an extent. In addition, the cotton yarn demand is also expected to gather strength from restoration of domestic demand following the temporary disruption caused by the transition to the GST regime and higher exports to China, before re-launch of its cotton auctions in March 2018.