For Indian sugar and cotton textile companies, October 1 marks the start of a new marketing year. And the beginning of slow, measured panic in their bankers.
Together, the two industries currently owe banks an eye-watering $35 billion, according to latest RBI figures. That is 20% more than what they owed last year. And beats by far the $24 billion banks have lent to the commercial real estate sector.
Unfortunately, banks don’t have a hope in hell of recovering their money this season. Take sugar. Mills are borrowing frenziedly to pay farmers for sugarcane. Last year, out of the industry’s total revenue of $16.43 billion, cane payments swallowed $11.40 billion.
This year will be worse. Cane is more expensive but sugar sales will slacken because mills are saddled with enough left over to supply India for three months, with another bumper crop expected over the next 12 months. Ex-mill prices shall stay subdued because the government tells mills how much to sell each month and ensures it exceeds demand.
Exporting the extra sugar is a logical solution. But as trade is regulated by a government more spooked by inflation than bad loans, all marketing decisions are out of corporate hands. Textile companies are in equal misery.
Confederation of Indian Textiles Industry says more than 60 companies, including Vardhaman, Raymonds, Lakshmi Mills and Nahar Mills, have reported net quarterly loss for the first time. The number of defaulters in the $62-billion industry is rising as managements beg banks to restructure working capital loans.
The decline in fortunes was so dramatic that it caught everyone by surprise. Till December 2010, life was good. A fifth of Indian yarn and a third of the cotton is surplus, for which China was willing to pay crazy prices.
Companies began buying every bale in sight to spin and process for China. Average operating profits inched towards 20%, the highest in three years. Then government busted the rave by banning exports in January. Suddenly the yarn and fabric made from extremely expensive cotton and bought through high-interest loans had no takers.
By April, prices crashed 50%. Today, spinners are struggling to recover cost of production. Clothing exporters are hit by sluggish demand in USA and Europe. Mills are running at 30% capacity. Most companies are entangled in disputes over contract defaults.
Those willing to settle have taken huge ‘haircuts’. Basically everyone is broke. Though exports have resumed, the new season brings no succor. There are no export orders.
Chinese demand is flagging because customers in the West are hit by recession. Globally, cotton is so abundant that futures contracts on Nymex are declining as the months go by. The December 2011 contract is at 99 cents per pound, the March 2012 contract is at 96 cents, the July 2012 is 94 cents and the October 2012 is also 94 cents.
Anyone foolish enough to stock cotton or yarn won’t recover even godown rent. India is expected to produce record 6 million tonne cotton, though mills can use only 4.5 million tonne. Who is responsible for this mess? Quite clearly, it is Udyog Bhawan and Krishi Bhawan’s creation.
By continuously meddling in every aspect of business – price of raw material, production, sales, exports, and inventory management, government has left managers in crop-based industries helpless and clueless. Analysts can predict commodity market risks, not political whimsy.
The gvernment influence operates in other insidious ways. In the guise of promotion, for years, government has pampered inefficiency, lethargy and unviable investments. Sick sugar mills are kept alive by frequent interest subventions. I
ndia now has the capacity to produce 30 million tonne of sugar without either the cane or the consumption to support it. No wonder insolvency is rampant. In textiles, life is more bizarre. On the one hand, industry is seeking loan restructuring.
On the other, it is encouraged to borrow more through subsidies on each loan. With another Rs 15,000 crore dangling under the Technology Upgradation Fund Scheme, can you blame businessmen for greedily announcing new factories that become white elephants? Their survival is totally dependent on continued sarkari largesse.
Unfortunately, when government runs a protection racket, banks are left holding the can. Such bad loans are India Inc’s real misery index. The genuinely loan-worthy balance sheets will emerge only after sugar industry is decontrolled and textile industry is taken off the incentive drip-feed.
Investment flows automatically into an inherently viable industry. So does credit. It is time harried bankers forced government to realize this first principle of business.