India Ratings & Research (Ind-Ra) has revised the outlook on the cotton sector to negative to stable for FY15 from negative. The agency has also revised the rating outlook on cotton companies to stable for FY15 from negative. This is because the revival in domestic yarn production for exports and favourable government policies have helped stabilise cotton prices at a higher level, which will stabilise the credit profile of cotton companies.

Ind-Ra has also assigned a stable outlook to the rice sector and companies operating in this segment for FY15, driven by increased productivity and high realisations to farmers.

Cotton Corporation of India expects domestic cotton production to be at a decade high at 37.5 million bales in FY15 with yields at a six-year high, attributed to favourable monsoons and higher acreage of high-yielding Bt (Bacillus Thuringiensis) cotton. However, the agency believes that the adverse weather developments in January 2014 will lead to lower-than-expected actual production for the marketing year (MY October-September) 2013-2014. Ind-Ra expects annual rice production to reach 100-110 million metric tonnes (mmt) in FY15, aided by increased productivity.

However for FY15, cotton prices are likely to remain at current levels with no more than a 10% change both ways. The attractiveness of Indian raw cotton prices (ginned) may continue in FY15 on account of an 8%-10% discount from global prices measured by Cotlook A index. Furthermore, a spurt in demand from garment manufacturing nations namely Pakistan, Bangladesh, Turkey and Vietnam is likely to offset the lower cotton demand from China in MY13-14. Additionally, Ind-Ra expects that the revival observed in domestic cotton yarn production in April-November 2013 to continue in FY15.

Favourable government actions such as raising minimum support prices (MSP) by 32% and 21% for medium and long staple length cotton, respectively, since MY11-12 have supported cotton prices. Realisations for rice framers are likely to increase, supported by increasing MSP while acreage remaining unchanged. Within rice, the basmati rice industry is likely to register higher growth in FY15, driven by higher exports and growing awareness among consumers for branded rice varieties.

Ind-Ra expects Indian cotton and yarn traders to maintain just-in-time inventory, given the uncertainty over the release of the Chinese reserve cotton and the possible pressure on cotton prices FY15 onwards. The agency expects MY13-14 to be another year of cotton surplus with global stock to use ratio remaining at a multi-decade high of 89.3%. China has nearly 59.7% of the global ending stocks. The Chinese government has indicated a desire to discontinue the current reserve policy and initiate trials for a target price subsidy scheme for MY14-15 to reduce the amounts of cotton imports into China. However, the cumulative impact will be a gradual moderation of cotton prices, which may play out over three to four years.

Release of Chinese Cotton: Ind-Ra believes that China's release of the reserve cotton into global markets will lead to an unprecedented fall in global and domestic cotton prices. This will adversely affect the operating profitability and liquidity of domestic cotton and yarn exporters and lead to a revision in the sector outlook to negative. Stable Chinese Reserve Policy, Moderate Cotton Prices: A stable reserve policy of China along with a calibrated release of cotton and moderate cotton prices would lead to a revision in the sector outlook to stable.

Decline in Realisation in Rice: Lower realisation in rice during FY15 due to either rupee appreciation or a decline in exports could negatively impact the profitability and credit metrics of basmati rice millers. This would lead to a revision in the rating outlook of sector companies to Negative.

Source:- business-standard.com