Profitability of polyester yarn manufacturers to improve by 100 bps next fiscal despite 3-5% drop in prices

Polyester yarn makers will see improvement in operating profitability by 100 basis points (bps) on-year, despite an expected drop of 3-5 per cent in price realisation. According to a CRISIL report, this will be driven by reduced imports from China, lower raw material prices, increased price discipline with consolidation in industry and also a healthy domestic demand. The improvement in profitability comes after a sharp decline of ~400 bps estimated for the current fiscal to ~7.5 per cent. 

“Next fiscal, domestic consumption in China will normalise, leading to lower threat of cheaper imports from that country. Consequently, we expect operating profitability of Indian polyester yarn makers to improve by 100 bps (on-year) to 8-8.5 per cent next fiscal,” said Gautam Shahi, Director, CRISIL Ratings. An analysis of 20 players in the segment by CRISIL indicated that better profitability, coupled with modest capital expenditure will keep the credit profiles of polyester yarn manufacturers stable in the next fiscal.

Also, prices of purified terephthalic acid (PTA) and mono-ethylene glycol (MEG), which account for 80 per cent of the raw material cost of polyester yarn manufacturers, are expected to moderate next fiscal. Not only the price moderation, PTA capacities too are expected to increase 15-20 per cent over next fiscal. This will, while enhancing the availability of raw materials, also keep prices in check. Further, with the consolidation of the industry and many large players coming to the fore and acquiring as much as 20 per cent of the total capacity, price discipline in the sector has improved.

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“In addition, domestic demand for polyester yarn will be healthy, given a growth outlook of 8-10 per cent for the domestic ready-made garments segment and an expected recovery in demand for home textiles next fiscal,” said Sushant Sarode, Director, CRISIL Ratings. Polyester yarn is a cheaper substitute for cotton yarn and increasing polyester blending will continue to drive healthy demand for polyester yarn makers, he added.

The sector is expected to incur modest capacity addition (around 6-7 per cent of the capacity) next fiscal while working capital is expected to remain stable with decline in realisation. That said, key monitorables for the sector will be volatility in crude oil prices and any further lockdown in China, which might impact the demand-supply situation.