Sunday, 10 July 2011

Important Factors in Judging Cotton Yarn Industries in India

Important Factors in Judging Cotton Yarn Industries in India

1. Cost Management

Raw material cost forms about 50-55% of sales, in a cotton spinning company. The ratio of indigeneous to imported cotton affects the cost, as imported cotton depends upon international cycles.

Power cost  forms a fair component of cost (about 10% of sales) and the power expenditure becomes very critical. Players using captive generation have an assured uninterrupted supply of power.

Efficient cotton procurement strategies like contract farming, proficiency in estimating the future trends in the cotton market, proximity to the cotton cultivation areas and optimal quantity of cotton procurement would help players in minimizing costs and achieving profitability.

2. Inventory management

Cotton is a seasonal crop and is harvested from October to February every year. Inventory management thus plays an important role as companies procuring optimum quantities of crop and stocking raw material

requirement for a considerable time can ensure availability of good quality raw materials at reasonable prices.

3. Economies of scale

As the industry is characterized by low margins, profitability depends on volume of sales and companies having high capacities can register satisfactory growth. High capacities can   also help players in bagging huge 
orders. Further, companies having the capacity to manufacture on multiple lines can take the advantage of simultaneous production of different counts.

4. Labour relations

Labour cost constitutes about 6% of sales. Given the labour intensive nature of the industry, the companies having cordial labour relations are better placed in terms of labour productivity and smooth operations.

5. Expansions / Modernization

Opening up of global markets in the post quota regime, requires companies to undertake expansions and modernisations at the appropriate time so as to gain advantage of the growing markets and the demand-supply gap. Ability of spinning units to replace obsolete machines with modern state-of-the-art machines will enable companies to cater to the export marketsand offer better quality products. Further, players foraying into downstream expansions can benefit from integrated operation.

6. Diversification

Product diversification

 Players having finer count yarn in their product mix, cater to the elite market segment where demand is relatively price inelastic and margins are high. Companies having capacity to produce double yarn have better product flexibility. Further, companies producing blended yarn rather than only cotton yarn, can efficiently tackle the cyclicality in the cotton yarn demand. Also,companies focusing on value added products can further improve their profitability.

Geographical diversification

A player catering to both domestic as well as export markets can diversify the risk of sluggishness in a particular market. Export oriented companies catering to various countrieshave lower country specific risk. However, a large composition of exports calls for foreignexchange management policies as fluctuations in the foreign exchange market can adversely affect such players.

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