Margin pressure on textile cos eases as cotton prices fall 20%

Cotton prices, which were on an upsurge, have fallen 20% in the last one month, easing margin pressures on domestic textile companies and raising prospects of price cuts for end-consumers.

Textile firms now expect to sustained margins, if not improved profitability.

The decline in prices in India, the world’s second-largest cotton producer after China, is primarily on account of improved production and a supply-glut in the overseas markets.

Prices of Shankar-6, the benchmark variety of cotton, have fallen 20% to Rs46,000-48,000 per candy from Rs62,000 a month ago. It quoted Rs51,700 a candy on April 29. One candy is equal to 355 kg of cotton.

Cotton prices had doubled from around Rs30,000-Rs32,000 per candy in August 2010 to more than Rs60,000 month ago.

Significantly, this price decline has reduced cotton yarn prices benefiting companies including Mumbai-based Mandhana Industries, which uses yarn to make garments for global brands including Tommy Hilfiger and FCUK.

Manish Mandhana, joint managing director of Mandhana Industries, said there has been a correction of around 10% from Rs240-245 per kg in yarn prices sometime back to the present Rs215-Rs220 kg.

“We would be able to maintain margins and also offer a reduction in prices to the end-customers,” said Mandhana, who sees margins improving in the April-June quarter.

Falling cotton prices could boost margins for companies that operate across the value-chain, such as Mumbai-based Alok Industries, which were until now fearing that runaway inflation would cut into their profitability.

The country’s textile and apparel market, which is currently pegged at $47 billion, is expected to grow 11% annually to reach $140 billion by 2020.

Sunil Khandelwal, chief financial officer, Alok Industries, said the present dip in prices might not lead to an increase in margins, but would surely help the company maintain them.

He said end-customers could enjoy a 4% to 5% reduction in prices eventually.

Alok has presence from yarn to garments to home textiles.
A dip in cotton yarn prices is helpful to Alok as yarn accounted for nearly 8% of the company’s Rs4,311.2 crore total business last year.   

On an averaged-out basis, operating margins for textile companies (with turnover above `100 crore) have increased from 14.35% in the fourth quarter of fiscal 2010 to 16.4% in last quarter of the last fiscal. Net profit margins have also improved from 2.6% in the fourth quarter of fiscal 2010 to 5.1% in the latest quarter.

However, experts are unsure as to how long cotton prices would continue declining as they believe there is still no visibility of whether this could be the beginning of a massive price correction. Also, as customers, too, would also demand a cut from declining prices, some players see sustained margins rather than improved profitability.

“I see this more as volatility and not much of a trend. There is a possibility of prices going either way,” said Madan Sabnavis, chief economist, Care Ratings. Unsurprisingly, cotton was the most volatile of all the 53 exchange-traded commodities in 2010, according to the Washington-based International Cotton Advisory Committee. Hoarding by Chinese suppliers is one of the biggest concerns, it said.

Some players, such as Suryalakshmi Cotton Mills, which have presence in the denim segment, believe cost major reduction in the denim segment is unlikely. “The reduction in cotton prices will definitely help maintain margins. However, I do not expect a major fall in prices in the denim segment as the demand continues to remain good. There could be a fall if the global market changes. Otherwise, I see only a very slight reduction in prices in the denim segment,” said Paritosh Agarwal, managing director, Suryalakshmi.

Aamir Akhtar, chief financial officer-denim, Arvind Ltd, a major denim player, said, “It is too early to comment on what kind of impact this could have both in terms of margins and reduction in prices for the end-customer,” he said.