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NEW DELHI (Commoditiescontrol) - A higher-than-expected rise in cotton acreage at 19 percent and a consequent 11 percent increase in crop production in FY17-18 are likely to moderate cotton prices in FY19, a report said.
"We have maintained a stable outlook for cotton textiles and synthetics for FY19. This is in view of expected margin expansion due to softening in cotton prices, improved consumer spending outlook in key user countries and the low base effect of FY18," India Ratings and Research (Ind-Ra) said in its latest report.
The report said that the slowdown in domestic demand for textiles, due to demonetisation and the goods and services tax (GST) implementation, seems to have bottomed out in seond half of FY18. Better margins, modest reduction in working capital requirements and subdued capex in FY19 will lead to an improvement in the overall credit profile.
The outlook, however, is constrained by the possible impact of pink bollworm on cotton output and prices, and increasing crude prices on synthetics, Ind-Ra said.
"Cotton textile demand is likely to substantially pick up on account of soft cotton prices and better affordability. The improvement in the margins of the yarn and apparel segment is likely to be largely driven by low input prices. Yarn inventories, as absolute value and as a percentage of production, declined over FY15-FY17. Given the positive textile demand scenario, yarn prices (which firmed up in FY18) are likely to remain steady and range-bound in FY19. This w ould benefit spinners, it said.
Ind-Ra expects domestic cotton demand to remain strong in view of a likely uptick in domestic GDP and consumer spending in FY19.
The report further added that a higher-than-expected rise in cotton acreage at 19 percent and a consequent 11 percent increase in crop production in FY17-FY18 are likely to moderate cotton prices in FY19, although domestic cotton prices increased in the last few months due to the pink bollworm issue.
The global stock-to-use ratio for cotton, excluding China, increased to 56 percent in FY18 from 47 percent in FY17, although Chinese inventory declined 17 percent yoy.
"An increasing crude price is likely to narrow the spread between cotton and synthetic yarns, thereby moderating the pace of switch to synthetics from cotton textiles. Operating margins of synthetics manufacturers may witness volatile margins due to fluctuations in crude price and delays in passing on cost inflation. However, these challenges are likely to be countered by improved demand growth on a year-on-year basis and operating leverage benefits," the report noted.
Ind-Ra also expects the textile sector to be boosted by the government of India’s decision to increase the budgetary allocation by 19 percent to Rs 71.48 billion for FY19. The initiative, along with a stable currency forecast of about INR66/USD, is likely to favour the export segment.
"GDP grow th rates across key export markets (except the Eurozone) are likely to improve in FY19, driven by high consumer spending and fiscal support. Indian exports of textiles are likely to be driven, like in the last three years, by high value-added ready-made garments (RMG) and apparels. Similarly, exports of low value-added aggregates of cotton/yarn/fabrics may continue to decline in view of low demand from China," it said.
Textile exports grew 2.2 percent yoy in first 9 months of FY18 on account of a global economic recovery despite an exchange rate appreciation and a reduction in duty draw back. Over FY15-FY17, textile exports declined on a year-on-year basis.
(By Commoditiescontrol Bureau; +91-22-40015533)
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