Will yarn mills spin profits on stable cotton prices?

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Cotton yarn mills have got a reprieve thanks to tumbling cotton prices. The price of raw cotton (Shankar-6) is nearly down to half the heights of Rs60,000 per candy scaled in March 2011. In fact, the March quarter showed that yarn mills’ performance has improved. Big mills such as Vardhman Textiles Ltd and KPR Mill Ltd managed to post a small net profit although this was much lower against the year-ago period. Others including Precot Meridian Ltd and Super Sales India Ltd were able to reduce losses from the preceding quarter.

The outlook on operating profitability is likely to improve, albeit only marginally, as mills gain from lower raw material prices. This is what has led to the spike in stock prices of most of the big spinning mills. But investors must note there is a key stumbling block for mills to overcome. Will they be able to buy and stock up raw cotton at the current low prices? This would help boost profitability going forward. Industry watchers reckon that mills are saddled with the legacy of high interest costs and hardly have cash to buy cotton at these low levels.

To compare, one must note the trend among Chinese mills (China being among the top producers of cotton textiles). They imported cotton from international markets to make up for the shortfall in local cotton production. According to the International Cotton Advisory Committee, increased cotton trade in 2011-2012 is due to a near-doubling of shipments to China. Ironically, this happened at a time when global cotton mill use is down by about 7-8% (the lowest in eight years).

Similarly, on home ground too, domestic yarn prices have not improved enough for mills to boost production. According to the Southern India Mills’ Association, traded volumes of yarn have been subdued in the last two months, keeping prices down. However, export registrations have increased during the period, which may be a boon for the mills, given the rupee depreciation. That said, they have to shield themselves against volatile currency movements.

In the final analysis, given that raw material costs are reined in, a smart turnaround in yarn mills’ fundamentals hinges on the demand for cotton yarn and a resultant increase in price. This, in turn, depends largely on demand for garments and home textiles from the three large markets of the US, Europe and Japan—all of which are currently challenged by a severe slowdown. Any further improvement in the share prices of domestic yarn mills will depend on a recovery for textiles and yarn in the global markets.

Source: http://www.livemint.com/2012/07/04100340/Will-yarn-mills-spin-profits-o.html?d=1

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