EBITDA margin of cotton yarn industry expected to see growth in FY14

CARE Research looks ahead to EBITDA margins of cotton yarn industry improving in FY14. However, the industry’s net margins would be constrained by the rising interest cost (due to burgeoning debt) and depreciation (due to additional capacity addition) but would remain higher than the margins reported in FY13.

Yarn is mainly imported by the countries which are involved in making the finished product i.e. fabric. The key export destinations for India include China, Bangladesh, Hong Kong, Peru, Korea, Turkey and Europe.

Cotton yarn exports from India grew from 615 million kgs in 2006-07 to 1,107 million kgs in 2012-13.

The growth in India’s yarn exports can be attributed to China’s concentration on production of high value added products which gave a boost to the cotton yarn shipments to China.

China accounts for 30 per cent of India’s cotton yarn exports, while Bangladesh accounts for 16 per cent. China imports a substantial amount of cotton yarn from India, as the cost of production in that country is higher, owing to high cotton prices.

Furthermore, depreciation in the rupee against the dollar has also helped exports gather steam.

However withdrawal of focus market scheme (FMS) and incremental export incentivisation scheme which was primarily focused to regions like Latin America and Africa will moderate the yarn exports to certain extent as such yarn would not be competitive when compared to Bangladesh or Pakistan for these destinations.

India has already exported 1,300 million kgs of cotton yarn in YTDFY14. CARE Research estimates that the direct yarn exports are likely to touch 1,500 million kgs by FY14 from current 1,107 million kgs in FY13.

China – The preferred nation for yarn exporters, however, cotton policies could play spoilsport Chinese government policy has mandated import quotas for cotton fiber, however there are no quotas affecting yarn imports. As a result, Chinese fabric manufacturers can import cotton yarn without restriction.

With high domestic fiber prices putting pressure on domestic yarn prices, demand for yarn imports has increased manifold.

India is in a very good position to tap the growing demand of yarn from China due to a decent cotton crop production this marketing year coupled with strong INR depreciation. The margins for Indian textile spinners would improve as they will try to capture a bigger share of Chinese cotton yarn imports. However, this import trend may be reversed if China decides to change its cotton stockpiling policy.

Industry profitability to be driven by export realizations Domestic cotton yarn industry had to face a tough operating environment last fiscal as firm input prices strained the industry’s topline as well as margins.