After two years of subdued performance, India's polyester yarn manufacturers are set to witness a recovery in operating profitability by 100-150 basis points (bps), reaching 7-8 per cent this fiscal (FY24), according to a CRISIL Ratings analysis of 20 polyester yarn makers, which account for approximately 40 per cent of the sector's revenue. This improvement is attributed to government countermeasures aimed at curbing the import of cheaper competing products.

In October 2023, the Indian government issued a Quality Control Order (QCO) mandating BIS certification for imported yarn, addressing the influx of cheaper polyester yarn from China. Despite India importing around 12 per cent of its total polyester yarn requirement in fiscal 2024, up from 7-8 per cent prior to fiscal 2023, Indian manufacturers faced pressure to match the prices of imported yarn to remain competitive.

In response to the QCO, China began exporting cheaper polyester fabric to India. To combat this, the Indian government imposed a minimum import price (MIP) of $3.5 per kilogram on synthetic knitted fabric in March 2024 to restrict uncompetitive imports. This measure has led to a decline in the volume of cheaper polyester yarn and fabric imports from China, as per CRISIL.

As a result, the revenue of domestic polyester yarn makers is expected to grow by 3-5 per cent this fiscal, following a flat performance last fiscal year. The recovery in operating margins is projected to boost cash accruals by 20-25 per cent this fiscal, after a period of moderation over the past two years.

Debt protection metrics, which were impacted by lower margins and moderate revenue growth in the last two fiscals, are anticipated to recover due to improved cash accruals and moderate capital expenditure (capex). Interest coverage is expected to improve to 5.5-5.7 times this fiscal, up from 4.0-4.2 times last fiscal. Gearing is projected to remain comfortable at 0.4-0.45 times, compared to 0.5 times as of March 31, 2024.

However, potential challenges such as a slowdown in demand from downstream segments, adverse movements in crude prices affecting raw material costs, or regulatory changes impacting the polyester yarn industry will need to be monitored closely in the future.

“The twin effect of the government measures will give domestic polyester yarn players a leg up. This is reflected in the fall in polyester yarn imports by 61 per cent in the seven months ending May 2024, after rising 92 per cent on-year in the seven months prior. The imports of synthetic knitted fabric, too, fell significantly in April-May on-year. Therefore, operating profitability of polyester yarn manufacturers will recover this fiscal and reach closer to the pre-pandemic level,” said Gautam Shahi, director, CRISIL Ratings.

Fibre2Fashion News Desk (DP)