The profitability of the textiles sector is likely to be supported by lower cotton prices and latest recovery in demand, report by India Ratings and Research (Ind-Ra) said. In wake of softening in cotton prices, improved consumer spending outlook in key user countries, the margins will expand which will in turn help in increasing profitability. The low base effect of FY18 will also help, as per the report. Demonetisation and GST implementation effect had started to fade in the second half of this year. Better margins, modest reduction in working capital requirements and subdued capex in FY19 will improve the overall credit profile, report said.
The probable impact of pink ballworm on cotton produce and possible increase in the prices of crude has constrained the outlook of textile sector. As the crude price increases, the spread between cotton and synthetic yarn narrows and fastens speed of switch from cotton textiles to synthetics. The fluctuations in the crude prices and delays in passing cost inflation may affect the operating margins of synthetics manufacturers. Nevertheless, these challenges are likely to be neutralised by the encouraging growth in demand on year-on-year basis, the report said.
At 19 percent, that is higher than expected surge in cotton acreage and consequent 11 percent increase in crop production in FY17-FY18 are likely to moderate cotton prices in FY19, the report says. The pinkworm issue may not be able to have much impact. The global stock-to-use ratio for cotton, increased to 56 percent in FY18 from 47 percent in FY17, although Chinese inventory declined 17 per cent year on year, the report said.
