The new cotton season from October 2019 to September 2020 ushers in hope of lower raw material costs for yarn mills. This could give a leg-up to profitability in the coming quarters amid weak exports.
Cotton Corporation of India estimates production to rise 13.6% year-on-year. Therefore, current cotton prices (Sankar-6 grade) are down 8% since September and 16% lower from the high of ₹129 per kg touched in April.
However, analysts reckon that mills would benefit from this drop in prices with a lag. Most of them are saddled with high-price cotton inventory, which eroded profitability in the last two- three quarters. “The spinning industry saw disruptions in production in Q2FY20 owing to reduced demand and volatility in cotton prices," said a recent report by India Ratings and Research Ltd.
Larger mills such as Ambika Cotton Mills Ltd, KPR Mill Ltd and Vardhman Textiles Ltd maintained operating margins at about 16-18%, but many small units faced high cotton prices. Shares of Vardhman Textiles and Ambika Cotton Mills have fallen 17% and 28%, respectively, in a year, while KPR Mill’s share price was buoyed by a recent buyback offer.
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