Even bigwigs couldn’t escape the uneasy spin around them this time. A majority of textiles producers, including Alok Industries, Bombay Dyeing and Raymond, recorded a sharp decline in q-o-q net profit for the quarter ended June 30 due to a steep fall in realisation of finished products and a dramatic spurt in interest rate on the loans availed for working capital needs. The net sales of these companies also fell steeply during the first quarter of the current financial year.
The net profit of Alok Industries, the integrated textile producer, plunged from a massive Rs 160 crore in the last quarter of the previous fiscal (2010-11) to Rs 57.77 crore for the quarter ending June. Similarly, the net profit of Rs 81.95 crore in the last March quarter of industry leader Bombay Dyeing turned into a loss of Rs 39.79 crore in the June quarter. Raymond slipped into the red again to register a Rs 10-crore loss in the June quarter from a paltry net profit of Rs 1.30 crore.
ICRA noted that the spinners might find it tough to recover their costs in the second quarter 2011-12. This, the rating agency’s spokesman Rohit Inamdar said, would be so because the yarn would be produced utilising high-priced cotton procured from October 2010 to March 2011. “To sustain a healthy balance sheet,” he noted, “the gradual improvement in spread between yarn and cotton price and optimum capacity utilisation will be critical factors for cotton spinning mills in the short-to-medium term.” The regulatory risks for the sector have increased substantially with frequent policy-level changes such as restrictions on export of cotton, cotton yarn and availability of export benefits, he added.
Meanwhile, rising yarn prices, coupled with utilisation of low-cost inventory procured from October ’09-March ’10 enabled spinning mills to post an increase in their average operating profit margin to 17.5 per cent in 2010-11 from 14.5 per cent in 2009-10. The buoyancy in profitability was, however, deflated in the fourth quarter of 2010-11 due to the ban on export of cotton yarn which lasted from January 15, 2011 until March 31, 2011.
Faced with numerous problems faced by the export-oriented industries in general and textile sector in particular, the Indian Exporters Forum has urged the Commerce Ministry to extend Duty Entitlement Passbook Scheme (DEPB) to provide breather to them until Goods & Service Tax is introduced. DEPB, the most preferred scheme for exporters, comes to and end on September 30. Another problem the industry is facing is the rising interest rate which banks have raised by over 3.5 per cent.
According to Confederation of Indian Textile Industry, spinning mills have invested more than Rs 40,000 crore during the last ten years in capacity building and modernisation. This would mean that about Rs 5,000 crore per annum will have to repay to banks, its secretary-general D K Nair said.
The interest payment on these loans, he added, would amount to another Rs 2,000 crore. Thus Rs 7,000 crore will have to be paid by the spinning mills to banks during the current year. The other segments in the value chain also have huge repayment commitments. “A rise in interest rate means an increase in their repayment amount, thereby weakening textile mills’ financial health,” Nair said. “The highly leveraged capital structure, along with rising interest rates, exposes the industry to higher risk of defaults.”
Currently, spinners are loaded with high-cost cotton procured during the last season, and a large stock of finished yarn that is waiting to be picked up. This is likely to squeeze their profitability over the two-to-three quarters of 2011-12.
After a brief but sharp upturn, the Indian cotton yarn industry is facing a challenging environment yet again –this time, due to the steep fall in cotton prices since April. During the first quarter of the current fiscal, the benchmark Shankar 6 variety cotton fell by 38 per cent, thereby hitting textile producers’ realisation similarly. Cotton yarn prices for the benchmark 40’s combed variety had gone up to Rs 280 per kg. Currently, cotton prices are at Rs 170 a kg. Cotton yarn prices were selling as low as Rs 160 a kg a fortnight ago.