The surge in export demand for cotton yarn during the initial few months of the current financial year has helped the domestic spinners record a healthy recovery from the multi-year low profitability reported during FY2018 amid multiple headwinds, credit rating agency ICRA said in its latest report.
Even though exports have started to normalise and cotton prices have softened with fresh arrivals in the recent months (though still higher vis-a-vis last year), cotton yarn realisations have exhibited stickiness which, together with movement in cotton yarn stock levels, point towards a pick-up in domestic demand. Moreover, notwithstanding the moderation in Y-o-Y growth in cotton yarn exports in the recent months, trend in absolute exports remains healthy.
“Healthy demand and higher cotton fibre prices (vis-a-vis last year) have shifted cotton yarn realisations into a higher trajectory this year, with realisations averaging ~13% higher vis-a-vis an 11% increase in cotton fibre prices from last year. Additional benefits of lower cost cotton stocked during the last harvest season has helped in placing the recent performance of the cotton spinners amongst the strongest seen in more than five years in terms of gross contribution margins,” ICRA said.
Notwithstanding the volatility in Indian rupee against the US dollar during the current year, the sharp rupee depreciation between July and October 2018 also supported spinners’ INR realisations and hence contribution margins.
The aggregate operating margins of ICRA’s sample of 13 large spinning companies improved to two-year high of 13.7% in Q2 FY2019 vis-a-vis 12.2% in Q1 FY2019, after remaining subdued at 9-11% during the preceding five quarters.
On an absolute basis, the aggregate operating profit of ICRA’s sample in Q2 FY2019 stood at five-year high level, with 59% Y-o-Y growth and 9% Q-o-Q growth.
After growing at a strong pace of 50% Y-o-Y during 5M FY2019, India’s cotton yarn exports normalised in the subsequent months of September and October 2018, reporting a moderation in growth to 34% Y-o-Y in 7M FY2019. The growth initially had been driven by a more than two-fold increase in exports to China - one of India’s key markets for cotton yarn. Besides a low base effect, the staggering growth in exports was supported by the relative competitiveness of Indian cotton and yarn prices, providing an arbitrage opportunity to Chinese buyers.
Despite exports retreating to normal levels in the recent months in absolute terms, ICRA expects the annual growth in India’s cotton yarn exports to remain healthy at ~18-20% during FY2019 supported by a strong YoY growth of ~34% in 7M FY2019.