India's cotton spinning sector to grow 12-14% in FY24: ICRA

A significant slowdown in cotton prices, which results in reduced yarn realisations, is probably going to cause a 9–10 per cent year-on-year (YoY) drop in revenues to around ₹33,465 crore in FY24.

Cotton yarn exports typically account for approximately 25-35 per cent of India’s cotton yarn production, while the remaining is accounted for by the domestic market. While a steep decline (53 per cent) was witnessed in cotton yarn exports in FY23, there has been a trend reversal in the current fiscal. In the first seven months of FY24 (7M FY24), overall yarn export volumes grew by approximately 142 per cent (on a YoY basis) on a low base, and with increased exports to China, resulting in the share of exports in the overall production increasing from 19 per cent in FY23 to approximately 33 per cent in 7M FY24, ICRA said in a press release.

For FY24, ICRA estimates India’s yarn exports to increase by approximately 85-90 per cent on a YoY basis. Bangladesh, China, and Vietnam account for approximately 60 per cent of these exports. With the share of Asia in Indian yarn exports being approximately 70 per cent, no immediate impact on Indian yarn exports is expected due to the ongoing Red Sea conflict; any sustained continuance of this face-off would have a direct impact on apparel export volumes and a consequent impact on both domestic and export demand for cotton yarn and its realisations.

Domestic cotton prices witnessed a lifetime high in the first half of FY23 (H1 FY23) but declined steadily in H2 FY23. For 9M FY24, the prices declined further by approximately 25 per cent compared to average cotton prices in FY23, on account of a weak operating environment. As per the estimates of the office of the textile commissioner, domestic cotton production for calendar year 2024 (CY2024) is projected to decrease by 6 per cent due to a reduction in cotton sown area amid uneven rainfall. Cotton prices are expected to marginally increase from the current levels because of lower expected production.

Cotton yarn prices too had remained on a declining trend since June 2022 following the softening in cotton fibre prices and slowing demand from the downstream apparel companies. ICRA expects the cotton yarn prices to remain soft for the remainder of FY24 and increase marginally in FY25 with demand from downstream companies picking up. The average gross contribution margins for the spinners declined sharply by 19 per cent in 9M FY24 in comparison with the same in FY23 on account of a weak domestic demand.

Gross contribution margins for the spinners reached a multi-year low in August 2023 and improved 9 per cent in November 2023. Despite a modest increase in gross contribution margins in Q4 FY24 with new crop arrivals, ICRA estimates cotton yarn gross contribution to contract in FY24 over FY23 levels.

While cash accruals of spinners are expected to decline in FY24, ICRA expects the spinners’ borrowings too to come down in FY24. Lack of any major capital expenditure plans along with lower working capital requirements, given the softening in cotton prices, is likely to result in lower debt levels and, therefore, an improvement in capital structure for companies. Capital structure, as reflected by the total outside liabilities/ tangible net worth ratio, is expected to improve marginally to approximately 0.5 times in FY24 (0.6 times in FY23). However, following a decline in OPBITDA in absolute terms, ICRA expects the debt coverage ratios for the sector to weaken in FY24 with the ratio of total debt to operating profit falling to approximately 3.4 times from 2.6 times in FY23.

Jayanta Roy, senior vice president and group head, corporate sector ratings, ICRA, said: “Despite the increase in cotton yarn volumes, ICRA expects the operating income of Indian cotton spinning companies to decline by 9-10 per cent and operating margins to shrink by 200-240 bps in FY24 amid a significant drop in realisation and lower gross contribution levels. Nevertheless, in-house power generation capacities recently added by select players are likely to alleviate margin pressures in the medium term.

“The industry had undertaken high debt-funded capex in FY22 and FY23, partly due to the deferment of major capital expenses in the COVID period (FY21). Consequently, with a drop in yarn demand in H2 FY23, the coverage metrics of the industry deteriorated in FY23. Due to weak domestic demand and lower realisations in FY24, the spinners have halted major capex plans in the near term. ICRA, however, expects a marginal pick-up in capex announcements for FY25, driven by modernisation requirements of machinery, flow of demand from the China Plus One scheme, and improvement in domestic demand from downstream apparel companies.”

Fibre2Fashion News Desk (DP)