Profitability of spinners is likely to be under pressure as the overall cotton yarn demand is expected to remain moderate, ICRA said in a report.
In ICRA's view, as overall yarn demand is expected to remain tepid, spinners may have to sacrifice capacity utilisation or contribution. Hence, their profitability is likely to remain under pressure.
Moreover, the spinners continue to face challenges on account of the high cotton prices as well, it said.
In the first half of 2016-17, cotton prices remained high due to low domestic availability, which was further impacted by continued fibre exports amid uncertainty on the actual crop-size following slower arrivals.
During the last quarter of 2016-17, the domestic cotton prices averaged at Rs 120 per kg, which is higher by 29 per cent on a year-on-year basis, the rating agency said.
ICRA said in spite of the expected improvement in cotton sowing in the upcoming kharif season, continued high cotton fibre exports and the uncertain monsoons are expected to keep the prices firm.
Besides profitability pressures, high cotton prices are likely to translate into higher working capital requirements of domestic mills and higher borrowings, it said.
Further, ICRA said, the growth in spun-yarn production declined to a five-year low in FY17.
The improved competitiveness of PSF (polyester staple fibre) compared to cotton resulted in a 5 per cent Y-o-Y growth in non-cotton yarn production in FY17. The yarn output is estimated to have decreased by 2 per cent, it added.
The weak trend in cotton-yarn production primarily mirrored the decline in cotton-yarn export volumes till November 2016 due to lower demand from China amid improved local mill usage.
Although the cotton yarn export volumes improved in December 2016, production remained constrained due to the government's demonetisation drive, ICRA said.
"The domestic spinning industry remains highly dependent on exports, with a third of India's cotton yarn having been shipped during the past five years.
"Further, high dependence on exports to China and the resulting sensitivity of India's exports to China's policy on reserve cotton stock warrant a cautious outlook on yarn exports," ICRA Senior Vice-President and Group Head Jayanta Roy said.
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