ICRA anticipates a robust recovery for India's cotton spinning industry in fiscal 2025 (FY25), with an expected growth of 6-8 per cent. This revival will be driven by a 4-6 per cent increase in volume and modest realisation gains. This forecast follows two years of decline due to subdued domestic demand and falling yarn realisations.

Over two-thirds of the total cotton yarn produced is consumed domestically, and signs of recovery are emerging from downstream segments such as readymade garments and home textiles. While exports, which rebounded in FY24 on a lower base, are likely to stabilise in FY25, they will face challenges from sluggish global demand. However, a shift in sourcing preferences away from other countries is expected to mitigate this impact.

Domestic cotton prices, which peaked sharply in the first half of FY23, reaching an all-time high of ₹284 per kg (approximately $3.4), have been on a downward trend over the last two years. Average prices fell by approximately 26 per cent year-over-year in FY24 due to a moderation in global prices and weak end-user demand. In the near term, prices are expected to rise slightly due to recovering demand and a projected reduction in the cotton sown area. Cotton yarn prices, which have been declining since June 2022 amid softening cotton fibre prices and reduced downstream demand, are also expected to see a marginal increase in FY25, though they will remain sensitive to demand fluctuations, ICRA said in a press release.

The industry faced significant debt-funded capital expenditures in FY23, partly due to deferred major capital expenses during the COVID-19 pandemic (FY21). As a result, the industry’s coverage metrics deteriorated in FY23 with a drop in yarn demand in the second half of FY23. In response to weak domestic demand and lower realisations in FY24, spinners have paused major capital expenditure plans in the near term. However, ICRA expects a slight increase in capex announcements in FY25, driven by the need to modernise machinery, demand flow from the China Plus One scheme, and improved domestic demand from downstream apparel companies.

K Srikumar, senior vice president and co-group head, corporate sector ratings, ICRA, said: “The operating income of Indian cotton spinning companies is estimated to improve by 6-8 per cent in FY25 with a recovery in domestic demand and marginal rise in yarn realisations. The gross contribution margins for spinners, which contracted sharply by approximately 20 per cent YoY in FY24 amid weak domestic demand, recovered by an estimated approximately 5 per cent in Q1 FY25 and the recovery trend is likely to continue for the remainder of FY25. Accordingly, ICRA expects the operating profit margins to expand further by 100-150 bps, supported by scale benefits and the cost-saving measures undertaken by industry players.

“The industry leverage levels rose in FY24, primarily due to the increase in short-term borrowings availed to fund the incremental working capital requirements. The leverage levels are expected to reduce with better cash accruals and expectation of minimal capex spending. Consequently, the industry’s debt protection metrics shall witness some improvement—the total outside liabilities to tangible net worth ratio is expected to improve marginally to approximately 0.6 times in FY25 (0.7 times in FY24), while the total debt to operating profit ratio shall improve to approximately 2.5-3 times from 3.5-4 times in FY24.”

Fibre2Fashion News Desk (DP)