Besides, government policies on cotton and yarn exports distort the demand/supply equation, which affects the company’s results (usually adversely)
Katare Spinning Mills operates in the textile (cotton yarn) and hotel industries.
The profits on both segments are similar.
Management expects cotton yarn demand to remain strong domestically and internationally over the long run.
The company operates a hotel in Solapur with about 54-room capacity. It is enjoying reasonable occupancy rates as a result of tourism and industrial development around the area as well as a refurbishing exercise undertaken on the hotel in the previous year.
The company reported reasonably stable operating profits (but declining margins) on growing revenues – reporting over 2cr in operating profits on revenues of 47cr. Its net debt load appeared to be backed by net current assets alone.
The business is exposed to hikes in cotton prices, which shot up over 100% in the previous year. This has resulted in lack of demand and un-remunerative prices resulting in poor returns on substantial capacities added in previous years. Inflationary factors also raise other costs, which the company is unable to pass on effectively to customers as a result of relatively low bargaining power with brand-name customers.
The textile industry suffers from periods of overcapacity depressing selling prices and profit margins. Overall, the industry is notorious for generating low returns on capital.
The company, being a net exporter, is adversely impacted by the recessionary economic conditions in customers’ countries as well as a strengthening INR.