February 5: In recent weeks, the domestic manufacturers of synthetic textiles have rolled back production. Indo Rama Synthetics initiated the move by scaling down its production and was soon followed by Century Textiles (which has since cut production by one-third), and Rajshree Polyfils, a manufacturer of polyester chips.The logic for doing so cannot be doubted as the fall in polyester product prices could not be curbed, and with prices of most of these polyester products already down by 25-30 per cent in the last few months, manufacturers were badly affected, especially Indo Rama, which was running new plants at poor capacity-utilisation levels.
The strategy seems to have started working as market leader Reliance Industries and Indo Rama have both announced an increase in prices of partially-oriented yarn (POY) while Indo Rama has increased the price of polyester fibres, even though there has not been any significant change in offtake.
Now, the other textile segments seem to be following suit. Thecotton yarn manufacturers have decided to come together to try and shore up selling prices. Cotton yarn producers have been hit badly by a poor domestic cotton crop and low surplus stocks which have pushed prices up by 15 per cent in the last one month. This is a dangerous situation for the companies because this is the season for cotton deliveries and purchase prices along with interest rates will determine profitability for the year (as the companies have to hold raw materials for the rest of the year).
Therefore, the strategy seems sensible enough: reduce production in order to reduce offtake of raw materials and thereby force down prices.
But unlike polyester producers who have to contend with only domestic selling prices, cotton yarn producers also have to take into account raw material costs. The international demand and selling prices of cotton yarn are very crucial factors for cotton yarn producers.
Therefore, while the strategy may have started working for the synthetic textile producers itmay not be as easily replicated in the case of the cotton yarn producers.
Gangotri Textiles: scrip may fall further
Problems over raw material prices, depressed international selling prices and a possibility of a higher export quota of raw cotton to appease cotton growers has come at an inopportune time for the smaller but no less profitable and stable cotton yarn manufacturers like Gangotri Textiles.
Being a small company means that the company's troubles have been exaggerated by the fact that it is totally dependent on domestic raw materials (the bigger players resort to imports to keep costs low and a market for their products overseas), and importing at this juncture will be a very expensive proposition as its markets are local.
This is an unfortunate development for the company and others like it. The company, which came to the public with an equity issue in 1993-94, has since quadrupled its manufacturing capacities and increased revenues at over 50 per cent compounded rate for the lastfour years.
In fact, 1996-97 was the only exception when sensing an over-supply in the yarn market, the company chose not to expand its capacities immediately.
And unlike many domestic companies (within and outside the textile business), Gangotri has had a very stable track record of earning a good return on capital; 24 per cent last year.
Despite its record and ability to earn a decent return on capital the present troubles are expected to eat into the company's profit generating capacity.
And in anticipation of the company being forced to sell at reduced margins which in turn will hit its return on capital, the stock has been trounced to a three-year low, with every chance of falling further.
Copyright © 1998 Indian Express Newspapers (Bombay) Ltd.
