Operating profitability of cotton yarn spinners is expected to plunge 250-350 basis points from ~10-10.5 per cent last fiscal to decadal lows of 7-8 per cent this fiscal, said a report by CRISIL Ratings. This will be driven by shrinking spreads between cotton and cotton yarn, inventory losses and slower than expected pickup in downstream demand. Revenue too is expected to fall 13-15 per cent due to sharply lower realisations, even though volume is expected to grow at 10-12 per cent this fiscal on a low base of last fiscal.
It also added that the credit profiles of the spinners, however, will remain largely resilient owing to deleveraged balance sheets and modest capital expenditure (capex) plans, even as lower cash accrual will moderate their debt protection metrics. CRISIL Ratings analysed 88 cotton yarn spinners, which account for 35-40 per cent of industry revenue to report the findings.
Since raw cotton comprises ~60 per cent of total manufacturing cost, cotton-yarn spreads dictate the profit margins of spinners.
“Cotton-yarn spreads are expected to hover around Rs 75-80 per kg this fiscal from the super-normal level of Rs 100 per kg seen for most of last fiscal, because of a sharper fall seen in yarn prices compared to cotton prices in the first half of this fiscal. This is due to lower-than-expected pick-up in domestic demand for readymade garments this fiscal, especially in the knitted and denim segments. Better offtake of woven garments supported by return-to-office and rise in business and leisure travel, though, will partially offset this trend,” said Gautam Shahi, Director, CRISIL Ratings Ltd.
A sharp decline in cotton prices during the first half of the current fiscal, normalizing from exceptional highs of ~Rs 1 lakh per candy during last fiscal, resulted in inventory losses for spinners. Additionally, with cotton production in the current season expected to be healthy in line with last season, prices are expected to remain low in the range of 57,000- 62,000 per candy.
While lower yarn prices will keep sales volume higher, albeit on a low base of last fiscal, revenue of spinners will degrow by 13-15 per cent YoY this fiscal due to sharp fall in price realizations by 18-20 per cent YoY. Substantial reduction in yarn prices is aiding volume growth in exports and domestic markets this fiscal, CRISIL Ratings said.
“Though the credit metrics of cotton yarn spinners will moderate this fiscal with weakened operating performance, it will remain resilient on the back of deleveraged balance sheets and modest capex plans. Interest coverage ratio of the sample set will weaken to 3.1-3.2 times this fiscal from 5.1 times last fiscal, but gearing is likely to remain stable at around 0.6 times as on March 31, 2024,” said Pranav Shandil, Associate Director, CRISIL Ratings Ltd.
Going forward, CRISIL said, any further slowdown in demand from the downstream segments, mainly readymade garments, and any adverse movement in domestic cotton prices in the near term will bear watching. “Additionally, if international raw cotton prices sustain below the minimum support price of domestic cotton, the export competitiveness of the Indian cotton textile industry will be impacted, thereby remaining a key monitorable,” it added.