Turning The Wheel: ICRA’s Anticipated Surge In Cotton Demand Creates Buzz In The Industry
In a recent research note by ICRA on the domestic cotton spinning industry, the rating agency has anticipated a robust 12-14% growth in demand for FY2024, driven by a surge of 85-90% in yarn exports. This upswing is attributed to a shift in sourcing preferences away from China and heightened expectations of increased demand in the US and EU regions for the upcoming spring/summer season, influencing domestic demand from apparel and home textile manufacturers.
Despite the positive demand outlook, a significant drop in cotton prices is expected to lead to a 9-10% year-on-year decline in revenues, totaling approximately Rs 33,465 crore in FY2024. Jayanta Roy, Senior Vice President & Group Head, Corporate Sector Ratings, ICRA, commented, “Despite increased cotton yarn volumes, ICRA foresees a decline in operating income by 9-10%, and operating margins are likely to contract by 200-240 bps in FY2024 due to decreased realizations and lower gross contribution levels. Notwithstanding, newly added in-house power generation capacities by select players may alleviate margin pressures in the medium term.”
Cotton yarn exports, constituting 25-35% of India’s cotton yarn production, witnessed a trend reversal in FY2024, with overall export volumes growing by ~142% in 7M FY2024. The share of exports in the overall production increased from 19% in FY2023 to ~33% in 7M FY2024, fueled by increased exports to China. For the full year FY2024, ICRA has estimated India’s yarn exports to surge by ~85-90% on a YoY basis, with Bangladesh, China and Vietnam accounting for ~60% of these exports.
While domestic cotton prices hit a lifetime high in H1 FY2023, they steadily declined in H2 FY2023 and further dropped by ~25% in the first 9 months of FY2024. The anticipated decrease in domestic cotton production for CY2024, coupled with a weak operating environment, is expected to marginally increase cotton prices from the current levels.
Cotton yarn prices, on a declining trend since June 2022, are expected to remain soft for the rest of FY2024 and experience a marginal increase in FY2025 as downstream demand picks up. Despite a 19% decline in average gross contribution margins for spinners in 9M FY2024, there was a 9% improvement in November 2023. ICRA expects cotton yarn gross contribution to stabilize in FY2024 over FY2023 levels.
While spinners’ cash accruals are projected to decline in FY2024, ICRA anticipates a decrease in borrowings as well, resulting in an improved capital structure for companies. The debt coverage ratios, however, are expected to weaken in FY2024, reflecting the industry’s response to the decline in operating profit.
Roy concluded, “The industry, having undertaken high debt-funded capex in FY2022 and FY2023, is experiencing a cautious approach in FY2024. While capital structure is expected to improve marginally, ICRA envisions a slight uptick in capex announcements for FY2025, driven by machinery modernization needs, demand influx from the China Plus One scheme, and improved domestic demand from downstream apparel companies.”
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