Operating Profits Of Cotton Spinners To Plummet 250-350bps

Operating profits of Indian cotton yarn spinners will plummet 250-350 basis points from 10-10.5 percent in the previous fiscal to decadal lows of 7-8 percent in the ongoing fiscal.

Crisil Ratings has attributed this to shrinking spread between cotton and cotton yarn, inventory losses and slower than expected pickup in downstream demand.

Revenue too, will fall 13-15 percent due to sharply lower realisations, even though volume is expected to grow at 10-12 percent this fiscal, albeit on a low base in earlier fiscal.

“Yet credit profiles of the spinners will remain largely resilient owing to deleveraged balance sheets and modest capex plans, even as lower cash accrual will moderate their debt protection metrics,” Crisil added.

Crisil conducted an analysis of 88 cotton yarn spinners, which account for 35-40 percent of industry revenues.

According to the ratings agency, since raw cotton comprises 60 percent of total manufacturing cost, cotton-yarn spreads dictate the profit margins of spinners.

“Cotton-yarn spreads are expected to hover around Rs 75-80 per kg this fiscal from super-normal level of Rs 100 per kg seen for most of last fiscal, because of a sharper fall seen in yarn prices compared to cotton prices in the first half of this fiscal,” Gautam Shahi, Director, Crisil Ratings said.

“This is due to lower-than-expected pick-up in domestic demand for readymade garments this fiscal. Better offtake of woven garments supported by return-to-office and rise in business and leisure travel, though, will partially offset this trend,” he added.

A sharp decline in cotton prices during first half of current fiscal, normalising from exceptional highs of Rs. 1 lakh per candy during last fiscal, resulted in inventory losses for spinners.

Additionally, with cotton production in current season expected to be healthy in line with last season, prices are expected to remain low in the range of 57,000-62,000 per candy.

While lower yarn prices will keep sales volume higher, albeit on a low base of last fiscal, revenue of spinners will degrow by 13-15 percent year on year this fiscal.

This will be mainly due to sharp fall in price realisations by 18-2 percent year over year. Substantial reduction in yarn prices is aiding volume growth in exports and domestic markets this fiscal.

Though the credit metrics of cotton yarn spinners will moderate this fiscal with weakened operating performance, it will remain resilient on the back of deleveraged balance sheets and modest capex plans.

“Interest coverage ratio of the sample set will weaken to 3.1-3.2 times this fiscal from 5.1 times last fiscal, but gearing is likely to remain stable at around 0.6 times as on March 31, 2024.

Any further slowdown in demand from the downstream segments, mainly readymade garments, and any adverse movement in domestic cotton prices in the near term will bear watch.

Additionally, if international raw cotton prices sustain below the minimum support price of domestic cotton, the export competitiveness of the Indian cotton textile industry will be impacted.