December 6, 2024
Industry

Operating Margin Of Cotton Yarn Spinners To Hike 150-200bps: CRISIL

After the turmoil in fiscal 2023-24, operating margins of Indian cotton yarn spinners will improve by 150-200 bps to 10.5-11 percent in fiscal 2024-25 after hitting decadal lows of 8.5-9 percent in previous fiscal.

According to a CRISIL report, in fiscal 2023-24, profitability was affected by lower cotton yarn spreads and inventory losses.

“This ongoing fiscal however, holds better promise due to stable cotton prices due to better availability of cotton and improved cotton yarn spreads will support improvement in margins,” the ratings agency explained.

Revenue too will grow by 4-6 percent this fiscal, driven by moderate growth in downstream demand amid stable yarn prices, after a 5-7 percent 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.” CRISIL added.

CRISIL further said that an analysis of 95 cotton yarn spinners, which account for 35-40 percent of the industry revenue, indicates as much.

“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,” Director Gautam Shahi said.

“The improvement was already visible in the second half of fiscal 2023-24, as higher cotton arrivals resulted in normalisation of cotton prices, thereby improving margins of spinners,” he too added.

“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 percent this fiscal,” Shahi stated

On the revenue front, while yarn prices are expected to remain flat, domestic sales volume, which forms 70-75 percent of the industry pie, is set to grow 4-6 percent this fiscal, backed by orders from key end-user segments.

However, exports, which staged an exceptional recovery last fiscal with 80-85 percent growth, are likely to grow only 3-4 percent this fiscal, given sluggish global economic growth.

With recovery in demand and operating performance, capacity utilisation level for the industry has reached 80-85 percent and is expected to improve further this fiscal.

“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,” Pranav Shandil, Associate Director, CRISIL Ratings too added.

“As a result, interest coverage ratio is expected to improve to 5-5.5 times this fiscal from 4 times in fiscal 2023-24. Gearing, too, is expected to improve moderately to 0.55 time from 0.64 time,” Shandil observed

“However, any further slowdown in demand from segments like garments and any adverse movement in domestic cotton prices vis-à-vis global prices in the near term will bear watching,” CRISIL concluded by saying.

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