Cotton Yarn Demand To Recover In FY2025: ICRA

• Domestic demand growth is set to outpace exports, driven by a recovery in downstream segments.
• Operating margins are expected to expand by 100-150 bps in FY2025 with improved gross contribution levels.

ICRA forecasts a recovery for the domestic cotton spinning industry in FY2025, with a growth of 6-8%, supported by a 4-6% volume increase and mild realization gains. This follows two years of decline due to subdued domestic demand and falling yarn prices. Over two-thirds of the cotton yarn produced is consumed domestically, with recovery signs in downstream segments like ready-made garments and home textiles. While exports rebounded in FY2024, they are expected to normalize in FY2025 amidst global demand headwinds, offset by a shift in sourcing preferences away from other countries.

Domestic cotton prices, which peaked sharply in H1 FY2023 to a lifetime high of Rs 284 per kg, have been declining over the last two years. The average prices fell by ~26% YoY in FY2024 due to moderating global prices and weak end-user demand but are likely to marginally increase soon with recovering demand and reduced cotton sown area. Cotton yarn prices, declining since June 2022, are expected to rise marginally in FY2025 but will remain exposed to demand fluctuations.

K Srikumar, Senior Vice President & Co-Group Head, Corporate Sector Ratings, ICRA, commented: “The operating income of Indian cotton spinning companies is projected to improve by 6-8% in FY2025 with recovering domestic demand and marginally higher yarn realizations. The gross contribution margins, which contracted sharply by ~20% YoY in FY2024, have recovered by ~5% in Q1 FY2025 and are expected to continue improving. Consequently, operating profit margins should expand further by 100-150 bps, supported by scale benefits and cost-saving measures.”

The industry had high debt-funded capex in FY2023, partly due to deferred capital expenses during the Covid period (FY2020-21). This led to deteriorated coverage metrics in FY2023. Due to weak domestic demand and lower realizations in FY2024, major capex plans have been halted. However, ICRA expects a slight increase in capex announcements in FY2025, driven by modernization needs, demand from the China Plus One scheme, and improved domestic demand from downstream apparel companies.

“The industry’s leverage levels increased in FY2024, primarily due to short-term borrowings for incremental working capital needs. These levels are expected to reduce with better cash accruals and minimal capex spending. Consequently, debt protection metrics should improve, with the total outside liabilities to tangible net worth ratio expected to improve to ~0.6 times in FY2025 (from 0.7 times in FY2024), and the total debt to operating profit ratio improving to ~2.5-3.0 times from 3.5-4.0 times in FY2024,” added Srikumar.