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Shanthi Venkataraman

The spinning sector is among the more modern sectors of the Indian textile industry. But it is not without its share of problems. However, the recent Budget spells good news for the cotton spinning industry and Vardhman Spinning, one of the big players, is all set to reap the benefits. Mr S. P. Oswal, Chairman of the Vardhman Group, spoke to Business Line on the impact of the Budget proposals on the textile industry and the prospects for the spinning sector.

Excepts from the interview:

What is your reaction to the Budget proposals for the textile industry?

The level playing field for all sectors of the industry and the low incidence of indirect taxes, as provided in the Budget, will lead to consolidation and restructuring of the industry. It will also bring fresh investment into the industry to the tune of Rs 75,000-Rs 80,000 crore in the next five-six years.

What impact will the removal of the mandatory excise duty on pure cotton in all stages have on operations?

The removal of mandatory duty on pure cotton will lead to increased transparency especially in the cotton yarn market. Tax compliant mills will now have a fair deal in the market as against tax evading/exempted mills.

Also, earlier there was a hidden incentive to remain small and employ primitive technology especially in the knitting and garmenting sectors to avoid excise complications. With the removal of excise duty, not only will the scale of production in these sectors increase, but these sectors will also move up the value chain. Therefore, the increased manufacturing activities in the downstream industries will create demand for cotton yarn which would benefit spinning mills.

Spinning companies turned in a good performance in 2003-04. What has driven this good performance?

One factor that drove performance was cotton prices. The price of cotton in October-November was moderate, which helped the industry. And in January-February, the cost of cotton incurred by the Chinese mills was higher, because China had a damaged crop in 2003-04. So, the yarn prices in China increased. So that was one factor which helped the mills earn greater profits in the second half of the year. However, since then, yarn prices have plummeted. This remains a worrying factor for the spinning industry.

Another factor that has helped is interest costs, which have declined for most mills. In the case of Vardhman, interest costs have fallen in the last three-four years from almost 7 per cent of sales to 4.2 per cent.

The third factor is that a number of mills have been improving their productivity and knowledge. We are aware of competition from Chinese mills and all of us are increasing our efforts to see that we can compete effectively.

Do you think that this performance is sustainable?

In 2003-04, because of the recovery in the prices of cotton, the streamlining of our technical operations and lower capital costs, we (spinning companies) were able to improve our performance. But at the same time, this kind of performance is not something that we can expect to repeat every year, until and unless we can control other aspects of costs, such as power, which is not in our control.

We produce about 3,000 million kg of yarn and I think we have only marginally improved in the last three years by about 4-5 per cent.

Why has growth been at such a slow pace?

If you need to attract investment, you must have a profitable operation. Margins in the industry are low. Barring a few mills, which because of a special product mix or a special market mix make more than normal profit, in my view, no one in the industry can have a windfall. They can just make normal profit.

If you look at the delta between the international cotton yarn price and domestic yarn price, it has been decreasing.

This is because since 1999, there has been a dramatic increase in production capacity of cotton yarn in China, which has been crashing the price line. So, the industry has to be genuinely worried because now the factors of cost are against us. Our margins are lower now and if we have a low margin, we do not compensate the capital.

Capacity utilisation is still low in the spinning industry and yet spinning mills are expanding capacities. Are some of these mills be setting themselves up for an overcapacity trap?

I would not say that low capacity utilisation makes a case for not expanding. Expansion in the right segment of the market is justified — for instance, it can be done in compact yarn spinning, which is a new technology.

There could be several reasons for individual organisations to look for marginal expansions or even major expansions- strategic reasons could support it. But if you go truly on market economy it may not be viable.

Going by margins today, it may not be attractive to expand spinning capacity. But, no doubt, there could be various other considerations that are weighed by the entrepreneurs. In the case of Vardhman, we are putting up weaving capacities. So, we would like to expand our spinning to meet the demand from our weaving operations.

Vardhman is one of the larger integrated units. Many believe that an integrated facility would be a big advantage post 2005... .

Shorter lead time is one advantage. Also, the buyer is confident that the supplier is able to have control on the material up to the fabric stage.

We are not integrated into garments. I do not think integration into garments offers any big advantage because we cannot produce fabric according to what the garments require. You would have to outsource fabric (to some extent), because you cannot always do it internally.

Up to the fabric stage, integration does offer value to the garment producer because there is no intermediary. The yarn, fabric and finishing is vested with one person. And in India, the imponderables are so many, that if you have three different centres of production and you have a delivery time, 90 per cent of the time you will delay (in delivery).

What is Vardhman's future plans?

We plan to expand in fabric. Our fabric presence is small. We are just making about 25 million metres and by world standards it is not enough.

We need to go to about 45 million metres in the finishing. Accordingly, we will expand some of our spinning because we now have no surplus yarn to divert to the weaving operations. We have some markets for our yarn, which we would not like to disturb.

Do you expect more growth from fabric than yarn?

We are moving in that direction.

Would growth be completely organic?

Yes, I think we will produce our own fabric. Our experience of sourcing fabric from smaller players has not been good.

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