CRISIL Forecasts Improved Operating Margins for Cotton Yarn Spinners
By 2024-04-17 15:03:49
Better Operating Margins for Cotton Yarn Spinners are Predicted by CRISIL
CRISIL Ratings anticipates a significant uplift for the cotton yarn spinning industry this fiscal year, with operating margins poised to improve by 150-200 basis points (bps) following last fiscal's decade-low margins of 8.5-9 percent. The forecast, outlined in a recent report, attributes the improvement to stabilized cotton prices and enhanced cotton yarn spreads.
The report cites stable cotton prices, bolstered by improved availability during the current cotton season, as a key factor supporting margin recovery. Additionally, it predicts a 4-6 percent increase in revenue driven by moderate growth in downstream demand alongside stable yarn prices. Last fiscal saw a decline in revenue due to a substantial reduction in yarn prices.
CRISIL's analysis, encompassing 95 cotton yarn spinners responsible for 35-40 percent of industry revenue, indicates an overall enhancement in credit profiles due to better operating performance and restrained capital expenditure on deleveraged balance sheets.
Gautam Shahi, Director at CRISIL Ratings Ltd., emphasizes the positive impact of improved domestic cotton availability on yarn spreads, expecting a recovery to Rs 90-92 per kg this fiscal from approximately Rs 87 per kg last fiscal. He anticipates a recovery in operating margins to 10.5-11 percent, buoyed by benign cotton prices and sustained domestic demand.
While yarn prices are projected to remain steady, domestic sales volume, constituting 70-75 percent of industry revenue, is set to grow by 4-6 percent driven by demand from key segments like readymade garments and home textiles. Conversely, exports are expected to grow modestly at 3-4 percent due to sluggish global economic conditions, following an 80-85 percent surge last fiscal.
CRISIL underscores the industry's improving capacity utilization levels, reaching 80-85 percent, with further improvement anticipated this fiscal. Moderate capex plans are forecasted for cotton yarn spinners, contributing to improved interest coverage ratios and gearing ratios.
CRISIL identifies downstream demand slowdowns and fluctuations in domestic cotton prices compared to international prices as key monitorables for the industry's performance in the near term.
