The profitability of spinning companies in the second quarter of 2016-17 likely to get hit, with domestic cotton prices surpassing international cotton prices, adversely impacting the yarn demand and export prospects for the spinning industry, ratings agency ICRA said.

Domestic prices of ginned cotton have increased significantly—from about Rs 90-92 per kg in April to around Rs 122 per kg now. Slow growth in domestic consumption and stagnation in exports are likely to adversely impact demand and export competitiveness of the Indian yarn, the agency said.

According to Anil Gupta, vice-president, corporate sector ratings, ICRA, slower cotton sowing and decline in cotton sown area apart from cotton stocking by intermediaries could have led to this sharp rise in prices.

As per ICRA estimates, the profitability of spinning industry will be adversely impacted because of the price rise as it faces challenges of slow growth in domestic consumption and high reliance on exports.

Gupta further said that both the factors are a challenge for the mills to sell their production and one can see a decline in capacity utilization and also contribution margins, to prevent inventory build-up. The spinning players, who may have stocked inventories for four to five months in March 2016, may witness improved profitability as they are likely to gain from higher yarn prices.

ICRA said that stability in cotton prices is most critical for a profitable textile industry as it minimizes the risks of inventory losses and the need for a price hike for the existing and future orders.

However, many spinning companies expected cotton prices to be stable in 2016, and the cotton inventory stocking was not beyond two months in March 2016.