Indian cotton yarn spinners brace for decade-low profit margin: CRISIL

The situation is further exacerbated by a 13-15 per cent reduction in revenue due to substantially lower realisations. However, there is a silver lining as the volume is projected to grow by 10-12 per cent this fiscal, albeit from a lower base compared to the previous year.

The main culprit behind this financial downturn is the substantial role of raw cotton, accounting for approximately 60 per cent of the total manufacturing cost. As a result, fluctuations in cotton-yarn spreads have a profound impact on the profit margins of these spinners, CRISIL Ratings said in a press release.

Gautam Shahi, director, CRISIL Ratings Ltd, said, “Cotton yarn spreads are expected to hover around ₹75-80 per kg this fiscal from super-normal level of ₹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. This is due to lower-than-expected pick-up in domestic demand for readymade garments this fiscal, especially in the knitted and denim segments. Better offtake of woven garments supported by return-to-office and rise in business and leisure travel, though, will partially offset this trend.”

One contributing factor to this challenging landscape is the sharp decline in cotton prices during the first half of the current fiscal, normalising from exceptionally high levels observed in the previous fiscal year. This drop has led to inventory losses for the spinners. Additionally, with the expectation of healthy cotton production in the current season similar to the previous one, cotton prices are projected to remain in the range of ₹57,000-62,000 per candy.

While lower yarn prices may bolster sales volume, revenue for spinners is expected to contract by 13-15 per cent on a year-on-year basis due to an 18-20 per cent decline in price realisations. The silver lining is that this substantial reduction in yarn prices is driving growth in exports and domestic markets this fiscal.

Pranav Shandil, associate director, CRISIL Ratings Ltd, stated, “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 time 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 watching. 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, thereby remaining a key monitorable, the release added.

Fibre2Fashion News Desk (KD)