Cotton yarn margins to rise 150-200 bps this fiscal: CRISIL.

Cotton yarn spinning industry is expected to perform better this fiscal year (FY) after facing challenges in FY 2024. A report by CRISIL Ratings predicts that operating margins for spinners will rise 150-200 basis points (bps) to 10.5-11 per cent this fiscal, recovering from decadal lows of 8.5-9 per cent last year.

Lower cotton yarn spreads and inventory losses impacted profitability in FY 2024. However, this fiscal looks more promising due to better cotton availability and improved cotton yarn spreads. Stable cotton prices are anticipated due to a good cotton season in 2024. CRISIL analyzed data from 95 cotton yarn spinners, representing 35-40 per cent of industry revenue, to make these predictions.

Revenue is also expected to grow by 4-6 per cent this fiscal, driven by moderate growth in downstream demand and stable yarn prices. This follows a 5-7 per cent decline in revenue last fiscal due to a sharp reduction in yarn prices. Credit profiles of spinning companies, weakened by lower cash flow in FY 2024, are expected to improve with better operating performance and moderate capital expenditure (capex) on already deleveraged balance sheets.

Gautam Shahi, Director of CRISIL Ratings, predicts that improved availability of domestic cotton along with sustained demand growth will drive the recovery of cotton yarn spreads to Rs 90-92 per kg this fiscal, up from around Rs 87 per kg last fiscal.

Yarn prices are expected to remain flat, but domestic sales volume, which makes up 70-75 per cent of the industry, is projected to grow 4-6 per cent this fiscal, backed by orders from key sectors like readymade garments and home textiles. Export growth is likely to be moderate at 3-4 per cent due to sluggish global economic conditions.

With recovering demand and operating performance, capacity utilization levels in the industry have reached 80-85 per cent and are expected to improve further this fiscal.

Capex for cotton yarn spinners is likely to remain moderate in the near term as they recover from last fiscal's lows. This reduces the need for significant debt additions, improving the debt situation. The interest coverage ratio is expected to improve to 5-5.5 times this fiscal from around 4 times in FY 2024. Gearing ratio is also expected to improve to 0.55 from 0.64.

CRISIL identifies potential risks as a slowdown in demand from downstream segments and any increase in domestic cotton prices compared to international prices.