Indian cotton spinners weave a growth story as ICRA forecasts 12-14% expansion in FY24

Buoyed by a growth in exports and rising domestic demand, India's cotton spinning industry is poised for a remarkable 12-14 per cent growth in the current financial year (FY24), says ICRA a leading credit rating agency. This translates to a potential volume increase of 12-14 per cent for domestic spinners, translating to an additional 1.5-2 million tonnes of yarn production, as per ICRA estimates.

Export boom

Leading the charge is a projected 85-90 per cent jump in Indian yarn exports, driven by several factors. "Competitive yarn prices compared to other major producers like China, and a likely improvement in demand from the apparel companies in the US and EU regions for their spring/summer season" are key contributors, noted the ICRA report. This shift away from Chinese cotton due to geopolitical tensions presents a golden opportunity for Indian spinners, who stand to benefit from increased market share and higher yarn prices. Besides a shift in sourcing preference from China, there is rising demand for spring/summer textiles in the US and EU.

However, a significant drop in cotton prices is likely to cause a 9-10 per cent decline in revenues, impacting domestic demand. In the first seven months of FY24, yarn exports soared by 142 per cent compared to the previous year, driven by increased shipments to China. This has pushed the share of exports in overall production from 19 per cent to 33 per cent. Bangladesh, China, and Vietnam remain the biggest buyers, accounting for 60 per cent of Indian yarn exports.

While the ongoing Red Sea conflict poses no immediate threat, its prolonged escalation could impact apparel exports and subsequently harm domestic and export demand for cotton yarn.

Domestic demand uptick

The domestic market is also expected to contribute to the sector's growth, with ICRA anticipating a 10 per cent year-on-year rise in demand for cotton yarn. This uptick is attributed to factors like increasing disposable incomes, a growing preference for locally-made garments, and government initiatives promoting domestic textile production.

Domestic cotton prices, after hitting record highs in H1 FY23, have steadily declined due to a weak market. Production is also expected to dip 6 per cent in 2024 due to reduced acreage and uneven rainfall. These factors suggest a marginal increase in cotton prices from current levels.

Yarn prices have mirrored the downward trend in cotton prices, further impacted by weak demand from downstream apparel companies. ICRA predicts continued softness in yarn prices for the rest of FY24, with a slight uptick in FY25 driven by potential recovery in downstream demand.

Operational efficiencies

Adding to the optimism are anticipated improvements in operational efficiencies. "Higher volumes will lead to economies of scale, while easing logistics bottlenecks at ports will further reduce costs," stated the ICRA report. This is expected to bolster profit margins for spinners, despite anticipated lower cotton prices, which may lead to a 9-10 per cent dip in overall revenues.

The industry witnessed a rise in debt-funded capex in FY22 and FY23, partly due to pandemic-related deferments. Now, with weak demand and lower realisations, spinners are holding off major expansions. However, ICRA expects a pick-up in capex announcements by FY25, driven by modernization needs, the "China Plus One" strategy, and potential improvement in domestic apparel demand.

Implications on stakeholders

• Cotton farmers: The projected increase in yarn production bodes well for cotton farmers, as it translates to a higher demand for raw cotton. This could lead to fairer prices and stable incomes for the farming community.
• Textile manufacturers: Textile manufacturers using cotton yarn as their primary raw material stand to benefit from increased availability and potentially lower yarn prices due to the competitive export market. This could improve their margins and competitiveness.
• Garment retailers: With a wider variety and potentially lower costs of cotton yarn available, garment retailers can offer a broader range of cotton-based clothing to consumers at competitive prices, potentially boosting their sales and market share.

Government initiatives

 The Indian government has been actively supporting the textile industry through various initiatives like the Production Linked Incentive (PLI) scheme for textiles and apparel. This scheme offers financial incentives to companies investing in the sector, thereby promoting domestic production and exports. Additionally, initiatives like the ‘Make in India’ campaign further boost the appeal of Indian-made textiles, creating a favorable environment for the cotton spinning sector to thrive.

While some near-term headwinds like moderating cotton prices and potential debt concerns exist, the long-term prospects for the Indian cotton spinning sector remain highly encouraging. With a focus on technological advancements, operational efficiencies, and continued government support, India is well-positioned to capitalize on the global shift towards sourcing cotton yarn from reliable and competitive alternatives. This growth story promises to benefit not only the cotton spinning industry but also the entire textile ecosystem, creating jobs, boosting economic activity, and solidifying India's position as a leading player in the global textile market.