- 23 May 2022
- ICICIdirect Research
South Indian mills to stop production amid high cotton prices
News: As per media reports , South India Spinners Association has decided to temporarily close all mills. The members of the association will not buy cotton until the situation is conducive. Several small spinning mills have decided to stop production as cotton prices have crossed Rs.1.15 lakh a candy (356 kg).
Views: The increase in cotton prices has been to the the tune of 53% (1.15 lakh per candy of 356 kgs) in Jan - May 2022, while the yarn prices have increased by only 21% ( from Rs.328 per kg to Rs. 399 per kg) during the last five months. This has led to smaller companies making a loss of Rs. 50-Rs.60 per kg if they buy on current prices. The larger companies have been better off owing to their stronger balance sheet and have been able to wade through the significant increase in cotton prices. However if the prices prevail at these levels even the larger players would have to buy cotton at elevated prices ( as old inventory would be extinguished and new cotton crop is expected in month of October onwards) but commensurate price increase from customers might not be forthcoming, which can pressurise their profitability going ahead. A sustained cotton inflationary scenario can be negative for companies in our coverage universe like Vardhman Textiles, KPR Mills and Gokaldas Exports which operate in the cotton value chain ( from yarn to garments).