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We expect cotton prices to come down by 10%-15%

TT Ltd, the Delhi-based yarn and fabrics manufacturer, reported robust financial performance in the second quarter, with net profit at Rs4.49 crore, a 216% growth over the previous corresponding period. In an interview with Moneylife’s Sharad Matade, Sanjay Kumar Jain, joint managing director of TT Ltd, discussed the impact of high cotton prices, the company’s performance and its plans to expand capacity and market share.

Moneylife (ML): Cotton prices have increased from Rs25,000 to Rs40,000 per candy over the last 10 months. Will this force you to increase product prices?

Sanjay Jain (SJ): Yes, it has forced us to increase product prices. For instance, we have increased yarn prices by almost 100%. We have been able to pass on the higher costs and that is why spinning companies' margins have expanded. This is an indication of the huge demand, not only in the Indian market but the global market too. Today, we are in sellers' market, so we could increase our product prices by more than the increase in raw material prices.

ML: Do you plan to increase prices further?
 
SJ: If raw material prices go up we will have to go for another hike in prices. But we expect cotton prices to come down by 10% to 15% in the next couple of months.

ML: On what basis do you expect cotton prices to drop?

SJ: India is seeing a surplus in cotton production this year. The production is estimated to be about 325 lakh bales compared to 295 lakh bales last year and I personally believe that it will cross the estimates. Till last year, the government didn't have a policy to regulate cotton exports. About 85 lakh bales were exported and very limited cotton was left for domestic players in 2009-10. This time, the government has come up with a clear policy that only surplus cotton will be allowed to be exported. So enough cotton will be available for us and it would bring some correction in cotton prices.

ML: Would you explain the reasons for the high cotton prices?

SJ: This rise in cotton prices is unprecedented and is not backed by fundamentals. The monsoon was delayed by a month, so the crop also got delayed by a month. Of course there is a shortage of cotton globally. But this is a short-term demand-supply mismatch. As arrivals (of cotton) pick up after Diwali, prices will come down. It is difficult to predict prices, but I feel that prices would come down to Rs35,000 per candy in the near future.

ML: Under international pressure, the government is reviewing its restriction on cotton exports. How will this affect the industry?

SJ: The government has clearly stated that it will only revise the export quota which is 55 lakh bales (for this year), if the crop increases beyond 325 lakh bales to whatever level. Only surplus cotton will be exported. Our requirements will not be affected.

ML: What is your outlook on cotton?

SJ: Today, India is one of the largest producers of yarn. This year we are expecting a surplus in cotton production, whereas other cotton-producing countries like China and Pakistan are likely to face deficit in cotton, and Indonesia and Bangladesh are net importers. This gives us maximum opportunities. Last year we had less cotton and more exports, but this year we will have more production and lower exports. On the international front, cotton prices are going up and will increase further because there is a huge cotton deficit. It's difficult to predict the long term as everything depends on the weather.

ML: TT Ltd has registered a 216% growth in profit in the second quarter. What is your target for the year?

SJ:  We have set a target of Rs18 crore for the bottom line and the top line at Rs500 crore. We have two value-driven segments-yarn and branded inner and casual wear-and, fortunately, both segments are doing well. So we expect higher profitability. We have experienced that the second half has usually been better than the first half and we hope to maintain that performance.

ML: What is your market share in the yarn business? What is the strategy to deal with the competition that is quite stiff in the inner wear and casual wear segment?
 
SJ: In the yarn segment, we are predominantly into exports. TT Ltd exports yarn to 35 countries and we have a 3% to 4% share of the country's total yarn exports. I would say we are in the top ten in the yarn business in India.

TT's knitwear products are for the masses; we cater to the 'B' and 'C' categories in the marketing pyramid where volumes are much more. Today, premium brands compete for a share of the 5% to 7% premium segment of the market. Many companies are getting into this premium brands segment, but there is no new company in the economic brands segment. Still, to compete in this environment we have introduced a new premium brand.

We have appointed distributors in the southern part of the country, but it will take a couple of years before we get a significant contribution from them. We are also opening our own franchise shops.

We have tied up with leading retailers across the country. This year, we have introduced more than 50 products. Currently, we have a capacity of three million pieces, but we plan to increase this to 10 million pieces in the next two years. Last year, exports constituted Rs225 crore of the total business of Rs350 crore. (TT's exports business is entirely yarn.)

ML: Will the appreciation of the rupee and high raw material prices affect your profit margin or the financial target for this year?

SJ: No, because demand is strong and I have the power to price my products. We will increase product prices if raw material prices go up, or the currency appreciates. The market is ready to take it as globally cotton prices are very high and all spinners are faced with the same problem. We need to charge a higher price, but yarn produced in India is still cheaper than yarn available in competitive markets.

ML: Could you tell us about the order-book?

SJ: We have an order-book for one and a half month. We do not want to keep an order-book beyond one and a half month because it is a very volatile market, with cotton prices changing every day, and we want to make sure that the company's margins are maintained despite fluctuation of raw material prices.

ML: Would you elaborate on your plans for the domestic and overseas markets?

SJ: We have had a policy to build a diversified market base, because different markets do well at different times. If we focus on only two or three markets, then in difficult times survival becomes difficult. We sell yarn to the top 15 markets. We don't have any intention to export our knitwear products because the Indian market gives us better prices, and the growth rate in India is much higher than the growth rate globally.

The company has a Rs150 crore capex plan over the next 18 months. Funds will be raised through a mix of debt and equity. About Rs100 crore is to be invested in the yarn business, Rs25 crore in garments and Rs15 crore for wind power. We plan to install 37,500 spindles at the existing units in a phased manner-12,500 spindles in the first phase and 25,000 in the second phase. The company has also tripled its advertisement budget to strengthen the TT brand across the country.
 

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