The increase in prices has been fuelled by unseasonal rain and floods in cotton-producing states
Cotton has been on an upward spiral, with prices of the benchmark Shanker-6 variety surging from Rs 7,677 a quintal on January 1, 2010, to Rs 12,092 a quintal on December 31, 2010, a rise of 57.5 per cent.
This was on expectation of lower production in 2010-11 due to unseasonal rain and floods in cotton-producing states like Maharashtra, Andhra Pradesh and parts of Gujarat. Initially, the Cotton Advisory Board estimated that the production would be around 32.5 million bales (one bale is 170 kg) in 2010-11. But, output this year will not be more than 29 million bales, according to estimates of the Southern India Mills Association (SIMA).
The price rise in December was fuelled by an expected rise in demand from exporters awaiting fresh export registration in January. However, the trend does not bode well for the textile industry (cotton yarn segment), as rising prices will put pressure on input costs, impacting margins. However, the price increase is likely to be passed on to consumers, say analysts.
But, the trend bodes well for polyester staple fibre (PSF) manufacturers such as Reliance Industries and viscose staple fibre (VSF) makers like Grasim Industries. Looking at the margin expansion in the entire polyester chain, analysts at Edelweiss had earlier anticipated that the polyester segment would boost RIL’s net profit in the third quarter of 2010-11 by 10 per cent.
Grasim is likely to benefit more, given the sluggish demand growth in the cement vertical and the negative impact of water shortage on the VSF segment during the first half. Analysts at IIFL estimate that earnings before interest, taxes, depreciation and amortisation margins for the VSF segment will increase six per cent to 39.4 per cent in the second half of 2010-11 as compared to the first half. Grasim’s consolidated revenues are expected to grow eight per cent year-on-year to Rs 21,598.7 crore in 2010-11. However, net profit is likely to decline 35 per cent to Rs 2,033.2 crore, according to IIFL estimates. At Rs 2,398.9, Grasim trades at 10.6 times 2010-11 estimated earnings.