Profitability of India's cotton yarn spinners to rise in FY24: CRISIL

The credit profiles of cotton yarn spinners are expected to remain stable as they have deleveraged balance sheets due to low capital expenditures in the past few fiscal years, generating cash flows in fiscal 2022, and likely improvement in operating profitability in fiscal 2024, as per a CRISIL Ratings analysis of 101 cotton yarn spinners accounting for approximately 35 per cent of the industry’s revenues.

Expected improvement in capacity utilisation, supported by improving domestic and export volumes in fiscal 2023, will bolster operating profitability of yarn spinners in fiscal 2024. Although cotton prices had begun rising in February-March 2022 and soared to all-time highs by May-June 2022, cotton demand remains steady with 4-5 per cent volume growth expected in fiscal 2024, supported by stable domestic readymade garments demand.

Export orders comprising 25 per cent of total yarn demand could be curtailed due to a slowdown in the global readymade garment market and its impact on cotton yarn demand. However, Indian exports will continue to benefit from the US ban on material coming from the Xinjiang region of China, and supply-chain derisking by global customers. Cotton yarn export volume is expected to grow at 3-5 per cent next fiscal, after halving in fiscal 2023.

Despite the spending, credit profiles of cotton yarn spinners will remain stable aided by improvement in profitability in fiscal 2024, lower leverage, and strengthened balance sheets. The gearing is expected to improve to 0.5 times in fiscal 2024, the lowest in the past five fiscals, compared with 0.6 times estimated for fiscal 2023. The interest coverage ratio of the sample set is set to improve to 4.8-5.2 times in fiscal 2024, up from less than 3.7 times estimated for fiscal 2023.

However, the lifting of the ban on Xinjiang cotton and any adverse movement in domestic cotton prices in the coming months will bear watching, as per CRISIL.

“The fall in domestic raw cotton prices below international prices also augurs well for domestic yarn spinners because it improves their competitive advantage. Expected improvement in operating performance will increase capex incurred by cotton yarn spinners by approximately 45 per cent to Rs 2,100-2,200 crore in fiscal 2024, versus Rs 1,500 crore average in the past three fiscals,” said Sehul Bhatt, associate director, CRISIL MI&A Research.

ALCHEMPro News Desk (DP)