Notwithstanding a predicted 10-12% on-year decline in revenue due to reduced realizations and subdued exports, India’s cotton yarn spinners are likely to have a 100-basis point improvement in operational profitability to 11–12% in fiscal 2024 (FY24). The operating profitability will still fall short of the pre-pandemic five-year average of 12–13%, but it will increase in fiscal 2024 after a steep decline of about 600–700 basis points predicted for fiscal 2023.
According to a CRISIL Rating analysis of 101 cotton yarn spinners accounting for roughly 35% of the industry’s revenues, the credit profiles of cotton yarn spinners are expected to remain stable as they have deleveraged balance sheets due to low capital expenditures in the previous fiscal years, generating cash flows in fiscal 2022, and possibly improving operating profitability in fiscal 2024.
The operating profitability of yarn spinners will be enhanced in fiscal 2024 by the anticipated increase in capacity utilization, which will be supported by increasing domestic and export volumes in fiscal 2023.
Even though cotton prices started to rise in February-March 2022 and reached all-time highs by May-June 2022, cotton demand is still solid, with volume growth of 4% to 6% anticipated in fiscal 2024, underpinned by steady domestic demand for ready-to-wear.
A slowdown in the worldwide market for ready-to-wear apparel and its effect on cotton yarn demand might lead to a reduction in export orders, which account for 25% of total yarn demand. Yet, the US embargo on goods from China’s Xinjiang area and supply-chain derisking by international buyers will continue to favor Indian exports. After halving in fiscal 2023, the volume of cotton yarn exports is predicted to increase by 3–5% the following year.
Notwithstanding the investment, cotton yarn spinners’ credit profiles will stay stable thanks to better fiscal 2024 profitability, reduced leverage, and more substantial balance sheets. Compared to the forecast of 0.6 times for fiscal 2023, the gearing is anticipated to improve to 0.5 times in fiscal 2024, the lowest in the previous five fiscal. The sample set’s interest coverage ratio is expected to increase to 4.8–5.2 times in fiscal 2024 from an estimated value of fewer than 3.7 times in fiscal 2023.
But, according to CRISIL, it would be essential to keep an eye on removing the Xinjiang cotton restriction and any unfavorable changes in domestic cotton prices in the upcoming months.
The decline in local raw cotton costs below international prices for domestic yarn spinners is also encouraging since it strengthens their competitive edge. According to Sehul Bhatt, assistant director of CRISIL MI&A Research, “anticipated improvement in operating performance will raise capex expenditure by cotton yarn spinners by roughly 45% to Rs 2,100-2,200 crore in fiscal 2024, from Rs 1,500 crore average in the previous three fiscals.
