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| High cotton, yarn prices tug at denim makers' margins |
| Vinay Umarji & Kalpesh Damor / Ahmedabad May 21, 2010, 00:58 IST |
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Fabric prices raised 15-20%, but it is not enough.
 Denim makers are feeling the pinch of spiralling cotton prices, both medium and short staple. This has put their margins under pressure, as they are unable to pass on the burden to consumers at one go. Denim makers have raised prices by 10-15 per cent since the beginning of April.
Denim companies mainly use short staple cotton (fibre length of 12-24mm) for manufacturing denim fabric and this raw material accounts for around half of their input cost. The prices of the short staple Kalyan V-797 cotton have surged by nearly 25 per cent to Rs 21,000 a candy (356 kg) from Rs 17,000 a candy at the onset of the season.
“The input cost has increased by 12-15 per cent following rise in raw material (prices) and it will have its impact on profitability,” says Vinod Arora, chairman, Aarvee Denims and Exports Ltd.
Seconding his thoughts is Jayesh Shah, chief financial officer of Arvind Ltd. “There is a strong demand for denim. However, due to unprecedented rise in cotton and even higher increase in yarn prices, the margins are under pressure,” he adds.
Leading denim companies such as Aarvee, KG Denim, Nandan Exim and Jindal Worldwide have not been able to fully pass on the burden of higher input cost to fabric buyers.
For instance, KG Denim, which manufactures around 20 million metres yearly, is sandwiched between keeping fabric buyers happy and curbing its rising input costs. While it could ward off the impact of rising input costs by hiking fabric prices by 15-20 per cent, it still ended in margins shrinking by 10 per cent.
Most producers have hiked prices of denim fabric to absorb escalating input costs due to firm cotton prices. “Denim fabric prices have increased to Rs 93-95 a metre from Rs 84-86,” adds Aarvee Denims’ chairman.
Limit to price hikes
Similarly, KG Denim hiked fabric prices from Rs 90-100 to Rs 110-115 a metre in the past month. However, such a step is too risky to be repeated. “There is no way that buyers will take another series of price hike in denim fabrics. The industry, including KG Denim, could hike fabric prices by anywhere between 15 per cent and 25 per cent. Yet, cotton and yarn prices have risen by 25 per cent and 30-35 per cent, respectively, in the last two quarters. And, it still leaves about 10 per cent of additional input costs that are being absorbed at the cost of margins,” says a source at KG Denim.
With China’s cotton crop getting damaged and Pakistan imposing a 15 per cent duty on cotton exports, the domestic cotton and yarn producers are making the most of it. Moreover, domestic as well as international fabric buyers or garment makers are not confident that the full burden will be digested by the end-consumers.
“Fabric buyers are reluctant to increase prices of end products. If denim makers force them to accept a bigger price hike, they may even look for other options in other countries, which could be detrimental for Indian denim fabric makers. Therefore, on an average, denim makers are taking a 10 per cent hit on their margins. If prices of cotton and cotton yarn continue to increase, it could further damage the sales,” says Deepak Chiripal, chief executive officer of Nandan Exim, the denim subsidiary of Ahmedabad-based Chiripal Group.
According to Chiripal, the impact on margins is higher for those manufacturers who buy cotton yarn instead of producing it themselves. A case in point is KG Denim which sources about 800 tonnes of cotton yarn monthly, of which 100-120 tonnes used to be from Pakistan.
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