Stable Cotton Prices: Muted international demand of cotton and surplus production are likely to keep cotton prices stable and range-bound during 2013. India Ratings expects cotton yarn manufacturers to benefit from slow but steady pick-up in domestic demand, the likely higher demand of cotton yarn from China and improving margins on account of low cotton prices and firm cotton yarn prices.

Stability in cotton prices will enable spinning mills to better plan the inventory buying. However, spinners in Southern India and Gujarat continue to underutilize capacity due to power shortage or incur high cost of self-generated power. 

Exports Demand Sluggish: India Ratings expects garment exporters’ revenues to remain subdued on the back of the persistent economic slowdown in key export destinations of US and Europe and continuous deterioration in India’s competitiveness in apparel exports.

However, to offset the impact, Indian exporters are diversifying into other geographies. Selling prices are likely to remain lower depending on companies’ bargaining power which is very low for small exporters or for low value added products (such as Rangoli International ‘IND BB+’). 

Existing Ratings Factor Risks: Around 88% of India Ratings-rated cotton textile companies have a Stable Outlook despite the industry outlook being negative to stable. This is because the agency has already factored into the ratings the weak credit quality marked by higher instances of near-full utilization of working capital limits and negative operating cash flows.  The same is true for 73% India Ratings-rated cotton textile companies with sub-investment grade ratings.

Liquidity Concerns in Small Companies: Timing/efficiency of cotton buying, receivables and inventory management would continue to be key liquidity determinants in 2013. In 2012, India Ratings took negative rating actions on companies that overused their working-capital limits and/or delayed debt servicing due to liquidity stress. Leverage indicators are weak, yet better than 2008-2009 slowdown, when companies were in midst of capex cycle and high on debt. 

What Could Change the Outlook?

Continued Stability: A stable outlook on cotton and synthetic textiles would require favorable policy environment, improvements in demand-supply position, continued stability in input costs and consequent improvement in margins/liquidity. It is unlikely that the sector’s outlook will turn positive until fundamental issues such as power shortage, lack of technology and modern machinery and demand slowdown are resolved. However, foreign direct investment (FDI) in retail is an opportunity that would unleash demand in the long run and offset any slowdown in exports.