Blame it on a sudden surge in global demand for cotton and yarn or production constraints faced by cotton spinning mills, it looks like cotton yarn prices are set to rise further in the coming months.

This, along with higher sales volumes, led to improvement in the operating profit margins of most large spinning mills. Vardhman Textiles Ltd registered operating profit margin of around 20% in the third quarter of the current fiscal, compared with 15% a year ago.

Overall, the spinning mills have seen a 3-5% expansion in profit margins.

Ironically, what will drive yarn prices up further is a global shortage of cotton, with high consumption countries such as China and Vietnam importing large quantities. “India, which produced 300 lakh bales during this season will have a surplus even after exporting about 67-70 lakh bales," says Sunil Khandelwal, chief financial officer of Alok Industries Ltd, a garments manufacturer.

Logically then, surplus cotton should see yarn prices move up with a lag, which has been the trend historically. However, this time round, the demand for yarn is increasing as a result of increase in demand for garments from developed markets.

Despite the Indian textile industry being adequately equipped in terms of spinning capacity, power constraints have hindered full capacity utilization. There is a divergence between manufacturers in western and southern India. “Most spinning mills in Tamil Nadu are able to operate only at 65% of their full capacity," says J. Thulasidharan, chairman of the South Indian Mills Association.

While mills in the south face a power shortage of around 40% of their requirements, those in the west are better off. Evidently then, in the face of rising demand for yarn and rising labour costs, if companies use merchant power or generators, costs will rise. Spinning mills will then choose to cash in on buoyant demand and raise prices.

Given the positive sentiment, share prices of profitable spinning companies that survived the recession have nearly doubled since July. Vardhman shares have risen from about Rs146 to Rs230 and that of Ambika Cotton Mills Ltd, from Rs77 to Rs143.

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