The domestic cotton spinning sector is anticipated to rebound in FY25, expanding by 6–8 per cent with the help of modest realisation increases and a 4-6 per cent increase in volume, stated a report by ICRA. This comes after two years of de-growth due to declining yarn realisations and muted domestic demand.
More than two thirds of all cotton yarn produced is used domestically, where recovering downstream industries such as home textiles and ready-made clothing are beginning to show signs of life. After increasing on a reduced foundation in FY24, exports are probably going to return to normal in FY25. While the exports will remain exposed to headwinds from sluggish global demand, a shift in sourcing preference away from other countries will offset this impact to an extent, it added.
The slowdown in global demand will continue to offer challenges for exports, although a move in the preference for domestic sourcing will somewhat mitigate these effects. K Srikumar, Senior Vice President and Co-Group Head, Corporate Sector Ratings, ICRA, said, “The gross contribution margins for spinners, which contracted sharply by approximately 20 per cent YoY in FY24 amid weak domestic demand, recovered by an estimated around 5 per cent in Q1 FY25 and the recovery trend is likely to continue for the remainder of FY2025. Accordingly, ICRA expects the operating profit margins to expand further by 100-150 bps, supported by scale benefits and the cost-saving measures undertaken by industry players.”
The last two years have seen a dramatic decline in domestic cotton prices, which peaked in H1 FY23 and reached a lifetime high of Rs 284 per kg. With a recovery in demand and an anticipated decrease in the area planted to cotton, the average prices, which dropped by about 26 per cent YoY in FY24 due to a decline in world prices and weak demand from end-user groups, are probably going to slightly rise in the near future.
Since June 2022, cotton yarn prices have also been falling due to a decline in the price of cotton fibre and a slowdown in demand from downstream industries. According to ICRA, the price of cotton yarn would only slightly increase in FY25 and will still be subject to fluctuations in demand.
Due in part to the postponement of significant capital expenditures during the Covid period (FY20–21), the industry experienced substantial debt-funded capex in FY2023. As a result, the industry’s coverage indicators declined in FY23 and yarn demand fell in the second half of FY23. The spinners have cancelled their long-term capital expenditure plans in light of the poor domestic market and decreased FY24 realisations.
However, ICRA anticipates a slight increase in capital expenditure announcements in FY25, driven by the need to modernise machinery, demand from the China Plus One programme and strengthening domestic demand from downstream garment companies. “The leverage levels are expected to reduce with better cash accruals and expectation of minimal capex spending. Consequently, the industry’s debt protection metrics shall witness some improvement, the total outside liabilities to tangible net worth ratio is expected to improve marginally to about 0.6 times in FY25 (0.7 times in FY24), while the total debt to operating profit ratio shall improve to approximately 2.5-3.0 times from 3.5-4.0 times in FY24,” Srikumar added.