The Indian spinning industry is faced with weak demand from overseas markets and poor yarn demand from the domestic garment sector. Growth in domestic yarn consumption stood at the lowest in four years during financial year ’16 (0.8 per cent for cotton spun yarn and 2.5 per cent for total spun yarn), and spun yarn production remained flat in the April to June quarter of financial year ’17 on a year-on-year basis.

So spinners will need to sacrifice profitability to maintain capacity utilization. Apart from profitability pressures, high cotton prices will translate into higher working capital requirements and hence borrowings and will translate into weaker credit metrics.

While industry profitability is expected to come under pressure, some of the stronger players, who had stocked cotton prior to the increase in cotton prices, may witness improved profitability driven by inventory gains during the second quarter of financial year 2017. The area under cotton cultivation is expected to decline for the second consecutive year by 12 per cent in 2017, following a seven per cent decline in 2016. Even a recovery in yields is unlikely to lift production. This is despite the good monsoons and high cotton prices.