Devika Banerji / New Delhi December 7, 2010, 0:20 IST
Besides soaring prices, small and medium players are also facing a shortage of yarn this year
As pricing pressures have increased for textile manufacturers and exporters all over the world due to rising cotton prices, Indian players are seeing their bottomlines shrink. This is despite a consistent flow of orders and estimates of increased domestic cotton output this year.
Contrary to the situation over seas, where supply is expected to fall, driving prices to new highs on estimates of lower global output, India is expected to see a 12 per cent increase to 325 million bales of cotton production this year. However, with exporters and traders finding it lucrative to export cotton rather than sell to domestic players, domestic cotton prices have been shooting up with units even apprehending a scarcity.
Indian garment manufacturers have been reeling under the high price of cotton since November 2009, when yarn prices saw a 40 per cent jump. However, the situation has worsened in the current year where, besides high prices, small and medium players are also facing a shortage of yarn.
Large exporters with a turnover of over Rs 1,000 crore like Gokaldas Exporters, who had braved the 2009 price rise, were significantly impacted this year. It bottomline plummeted into the red zone in the second quarter, primarily due to the over 50 per cent rise in input costs.
The company reported a 26 per cent increase in the cost of wages and around a 50 per cent increase in cotton fabric prices, which in turn resulted in the topline shrinking by 13.3 per cent to Rs 263 crore and a loss of Rs 27.10 crore, against a net profit of Rs 9.1 crore in the corresponding period last year.
“The orders executed in this quarter were badly affected by the rising cotton fibre prices and added to the steep wage increase with affect from April 2010. We could not pass on the rise in cotton prices to our customers since they were old contracts finalised much earlier,” the company stated in an official note.
For integrated players like Alok Industries, which manufactures its own fibre, the second quarter has been rather more comfortable as it has been able to pass on the impact of increased costs to consumers. The company posted a 40 per cent increase in net profit to Rs 79.8 crore in the second quarter. However, the company’s costs shot up by 51 per cent, primarily due to an increase in raw material costs.
“Until now, we have managed fine as the order situation is good. We are an integrated player, so we have been able to transfer the costs to consumers without affecting our bottom line,” says Sunil Khandelwal, chief financial officer, Alok Industries. Khandelwal further acknowledged that given rising cotton prices, demand for synthetic fibres like polyester had shot up, which positively impacted sales in value terms.
Hari Kapoor, managing director of Noida-based Allied Export Industries, which has a turnover of around Rs 156.2 crore, is also facing low realisations and finding it difficult to pass on the increased input costs to customers. “There is no point asking us whether we are impacted. Of course we are impacted. It is difficult to quote prices, as prices are consistently rising and availability is also scarce even as orders are flowing in,” Kapoor says.
Adding to the problems of exporters like Kapoor is the fragile rise in consumer demand from major export markets — the US, eurozone and Japan — making it impossible to pass on increased costs to consumers.
Industry players blame traders, particularly multinational trading houses, who book large quantities of new cotton crops through forward cover — that is, even before the crop comes to market — which reduces the availability of cotton for domestic mills and gives traders the power to manipulate prices. The cotton bought by trading houses is exported, as it is a more lucrative option.
The average current market price of cotton is around 90 per cent higher than the minimum support price of Rs 23,500 per candy. The domestic industry says it is unable to enter into such forward cover contracts due to the lack of adequate credit, as margin money for working capital loans for cotton purchases are high at 25 per cent and the loan period is limited to 6 months.
The government had, taking the situation into consideration, declared 5.5 million bales as the exportable surplus. Registration applications for the entire 5.5 million bales were received within 10 days and had to be discontinued on October 10.
Industry expects arrivals , including carryover stock from last year, to touch 10 million bales, of which 5.5 million is set to be exported, while around 4.5 million bales is estimated to be domestic consumption. This leaves negligible stock from December onwards, possibly driving prices further.
According to the Cotton Advisory Board, at any given time the ending stock should be adequate for around two months’ domestic consumption, or at least 5 million bales. “At this rate, there is no reason to believe that costs will come down any time soon, as consumption is only going to increase,” adds Kapoor.
The garment industry, particularly small and medium exporters, are apprehensive that the problem of increasing cotton prices and reduced availability will weed out the positives of incoming orders. The solution, they say, lies in delaying exports further to ensure supply for the domestic mills.
“By delaying exports by a month the government should ensure availability of cotton to the domestic industry. It is a temporary problem and can be managed by adequate policy measures. No Indian player can survive at this price, as pricing is the key for them,” says D K Nair, secretary-general, Confederation of Indian Textile Industry.
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