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Stable outlook rating for 88% of cotton textile mills

25 Jan '13
10 min read

Input Price, Inventory Risks: The cotton outlook could be revised to negative if input costs turn volatile, which could intensify inventory price risks, cash flows and liquidity. Given the sector’s high debt dependence for operational as well as capex needs, any volatility in EBITDA could lead to huge swings in leverage.

Key Issues

Demand Slowdown Persists

Garment exporters continue to face order slowdown with order sizes becoming smaller from existing clients in US and EU coupled with selling price pressure. To combat this, companies are venturing into newer markets such as Africa, Russia, Korea, Japan and Eastern EU. Demand is weakened further by tough competition from Asian peers such as China, Bangladesh and Vietnam who are lower cost manufacturers of apparel and also enjoy more favorable duty structure on exports. 

Domestically, weak consumer sentiment, high inflation and low wage growth have been dampening textiles and apparel sales. Discounts will be offered to encourage sales, but will keep margins under pressure. Different Segments, Different Outlooks Cotton yarn spinners’ outlook is stable as they are better positioned in terms of pick-up in demand with upcoming orders from China and lower cotton prices comforting their margins.

Companies such as Sharmanji Yarns (‘IND BB+’/Stable) are better positioned to weather cyclicality with flexibility to switch between cotton and synthetic yarn manufacturing. Production of cotton yarn increased by 13.9% yoy over April-November 2012.  Synthetic yarn spinners have a negative outlook as lower demand and rising cost of inputs are squeezing their margins. Production of man-made filament yarn decreased by 0.2% yoy over April-November 2012 whereas production of blended and 100% non-cotton yarn grew at 0.1% yoy  in the same period. 

Fabric players’ outlook is negative to stable as fabric companies’ margins are on slower revival as labor, power and fuel costs are edging higher (around 15%-20% of total costs) offsetting input price decrease. Domestic cotton apparel makers are on cautiously stable outlook due to a fall in raw material prices and modest demand growth. Cotton apparel exporters are on a negative to stable outlook while synthetic textile exporters have a negative outlook. Exports of synthetic textiles decreased by 12.4% yoy over April-October 2012.

Input Price Risks

India Ratings expects cotton and cotton yarn prices to remain stable in 2013. As per The Cotton Corporation of India Ltd., cotton production in the current season (October 2012 to March 2013) is estimated at 35 million bales (1 bale=170 kg) while domestic consumption is expected at 27 million, leaving 7 million surplus. However, cotton prices have remained volatile in the last two years and any unexpected volatility could adversely impact textile companies.

After trending upwards over June-August 2012, raw cotton prices declined in September 2012 due to higher–than-expected domestic arrivals of cotton and higher imports of cotton by spinning mills, in anticipation of a lower harvest. Cotton yarn prices rose in H2FY12 on higher demand from spinners and greater exports to China.

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