After a year of turmoil last fiscal, the cotton yarn spinning industry is expected to witness a breather this fiscal. Operating margins of cotton yarn spinners are set to improve by 150-200 basis points this fiscal after hitting decadal lows of 8.5-9% last fiscal, said CRISIL Ratings on Wednesday. An analysis of 95 cotton yarn spinners, which account for 35-40% of the industry revenue, indicates as much.
In fiscal 2024, lower cotton yarn spreads and inventory losses affected profitability. This fiscal, however, holds better promise. Stable cotton prices due to better availability of cotton during cotton season 2024 and improved cotton yarn spreads this fiscal will support improvement in margins.
Revenue, too, will spin up 4-6% this fiscal, driven by moderate growth in downstream demand amid stable yarn prices, after a 5-7% decline last fiscal due to a sharp reduction in yarn prices. Credit profiles, which were impacted by lower cash accrual last fiscal, will also improve with better operating performance and moderate capex on deleveraged balance sheets.
Gautam Shahi, Director, CRISIL Ratings said, “Better availability of domestic cotton and continued downstream demand growth will drive recovery in cotton yarn spreads to Rs 90-92 per kg this fiscal from Rs 87 per kg last fiscal. The improvement was already visible in the second half of fiscal 2024 as higher cotton arrivals resulted in the normalisation of cotton prices, thereby improving spinners’ margins. With cotton prices expected to stay benign and likely to remain below international prices, the operating margin is expected to recover 150-200 bps to 10.5-11% this fiscal.”
On the revenue front, while yarn prices are expected to remain flat, domestic sales volume, which forms 70-75% of the industry pie, is set to grow 4-6% this fiscal, backed by orders from key end-user segments – readymade garments and home textiles. However, exports, which staged an exceptional recovery last fiscal with 80-85% growth, are likely to grow only 3-4% this fiscal, given sluggish global economic growth. With the recovery in demand and operating performance, capacity utilisation level for the industry has reached 80-85% and is expected to improve further this fiscal.
Pranav Shandil, Associate Director, CRISIL Ratings said, “However, capex for cotton yarn spinners will remain moderate over the near term as they recover from lows of last fiscal, thus obviating the need for significant debt additions on already deleveraged balance sheets. As a result, interest coverage2
ratio is expected to improve to 5-5.5 times this fiscal from 4 times in fiscal 2024. Gearing, too, is expected to improve moderately to 0.55 time from 0.64 time.”
However, any further slowdown in demand from the downstream segments (such as readymade garments), and any adverse movement in domestic cotton prices vis-à-vis international prices in the near term will bear watching.
