Volatile cotton prices, weak domestic demand hurt Gujarat's denim industry

Most MSMEs running at 60 per cent capacity as high input prices have also made exports costlier

Volatile cotton prices and high inflation have forced Gujarat’s denim industry to function at 60 per cent capacity at a time when it was hoping to recoup losses in the upcoming festive season.

Gujarat has around 25 denim manufacturing mills, with a combined installed capacity of over 1 billion metres per annum, forming over 60 per cent of India’s total 1.6 billion metre per annum installed denim capacity.

The impact has been felt the most by micro, small, and medium enterprises (MSMEs), which are staring at low demand in both domestic and export markets.

According to denim makers, the industry has been forced to operate at sub-optimal capacity of around 60 per cent even as domestic deliveries have been impacted. This is because these players have been forced to pass on high input costs to buyers, leading to a 10-15 per cent rise in prices.

Cotton prices

Among input costs, cotton prices have fluctuated since the beginning of 2022.

The price of a candy of cotton, which weighs 356 kg, more than doubled from roughly Rs 36,000 in September 2020 to Rs 78,000 by February 2022, before touching a peak of Rs 1.10 lakh in May 2022. Though prices have eased since then, they were still high at Rs 80,000 per candy in July 2022 before rising again to Rs 95,000 in August.

According to the denim industry, which uses over 10 per cent of cotton produced in India, firms stopped procuring cotton as prices began to fall from the peak of Rs 1.10 lakh per candy in the expectation that there would be a further decline in prices. Now, however, they have been forced to purchase cotton at relatively higher prices in light of the continuing volatility, which has impacted their margins.

“Due to volatility in yarn and cotton prices, the user demand for denim fabric has also been fluctuating for us. People in the domestic market are currently reluctant to buy, leading to an increase in stock losses,” said Kumar Agarwal, chief executive officer of Ahmedabad-headquartered Venus Denim, which has a 36 million metres per annum installed capacity.

He added that denim products are made to order, and buyers are waiting to see if prices will stabilise.

Reduced exports

The industry has also been impacted by reduced exports, which has forced it to depend even more on the domestic market, said Vinod Mittal, managing director of Surat-based Vinod Denim.

“Dollar fluctuation and high shipping freights have put tremendous pressure on exports. But even on the domestic front, while the industry is operating at 60 per cent capacity utilisation, almost 20 per cent of denim produced is not getting delivered and remains in stock due to sluggish demand,” Mittal added.

Volatile cotton prices have also made India’s denim uncompetitive for MSMEs, since products from China and Bangladesh are now more affordable in the international market.

Agarwal explained that the textile industry depends on credit lines and fluctuating prices have resulted in order cancellations. “If cotton prices are regulated, this can be avoided,” he added.

Fluctuating prices and reduced exports have put an end to the denim industry’s plans to expand capacity ahead of the festive season. While Vinod Denim was planning to add another 12 million metres per annum capacity, Venus Denim was looking to ramp up by 20 per cent.

Listed players

Larger listed players are still better off, especially those like Jindal Worldwide, which also has its own backward integrated spinning capacity.

“With the help of our backward integrated spinning capacity, we have been able to improve our Ebitda margin to 11.5 per cent. We are fully integrated, so we have an advantage of buying cotton for our spinning capacity at lower levels,” said Gaurav Davda, head of corporate finance and strategic initiatives at Jindal Worldwide. “However, our quarter-on-quarter (QoQ) revenue was down by 12 per cent due to seasonal cycles but Q3 and Q4 will be better quarters for us. On an annual basis, we will grow in revenue in the high single digits due to per metre realisation increase and spinning capacity.”