BackOutlook for spinning mills improves
Outlook for spinning mills improves
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Reports on quixotic changes in export policy for cotton have stirred industry and investor sentiment in the last few days. Stocks of leading spinning mills like Vardhman Textiles Ltd, Ambika Cotton Mills Ltd and KPR Mills Ltd, rose on news of a ban on cotton exports during the season. The export ban is perhaps to pre-empt any undue rise in the price of cotton-- the key raw material in making yarn, as export registrations had crossed the magic number of 84 lakh bales that would help maintain a desirable stock of cotton when the season ends in August-September.
The focus of investors is on profitability. The last eight quarters saw a free fall in operating margins. For instance, VTL’s operating margin was down to 17% in the December quarter from 26% a year ago. Firms like KPR Mills and ACL took a bigger hit. Most firms were left holding high cost inventory of raw material, when global demand for yarn and yarn price suddenly snapped. Adding to their woes were rising interest rates that increased interest costs as working capital needs also rose.
In fact, the managements of most yarn exporters are still wary about tepid global demand for yarn. Industry statistics indicate that world consumption of cotton is still around the post-Lehman crisis (2009) level. Note that in spite of the rupee depreciation which boosted sales of most exporters during the December quarter, spinning mills reported flat or lower sales when compared to the year ago period.
Yet, the outlook for the next three to four quarters seems to spell recovery for spinning mills for many reasons. One, cotton output during the current season 2011-12 is expected to be around 345 lakh bales, up from 325 lakh bales in the previous season. Two, cotton prices on home turf are likely to remain at current levels or will be marginally higher during this procurement season, partly due to lower offtake from spinning mills especially in the southern region, where the 20-30% power cut will hinder production. Three, any dip in interest rates going forward will be an added kicker in lifting net profits.
Given these positives, investor sentiment is likely to remain favourable towards textile mills.
We welcome your comments at marktomarket@livemint.com
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