Amidst declining cotton prices, the outlook for cotton spinners is expected to improve.
Market Dynamics
Recent developments in the global cotton market have indicated a decrease in cotton futures, primarily driven by a reduced uptake from major consumer countries like China. This downturn in demand has prompted multinational traders to reduce their stockpiles, subsequently lowering domestic cotton prices by approximately 8-9% from their recent peak levels.
Impact on Domestic Cotton Spinners
Domestic cotton spinners, who have faced challenging quarters marked by low yarn sales and elevated cotton prices impacting their profitability, are now seeing a silver lining. With cotton prices declining, these spinners are poised for a potential turnaround in their financial performance. The easing of cotton prices is particularly timely, coinciding with a recovery in demand for readymade garments and home textiles both locally and in export markets.
Industry Projections
According to a Crisil Research analysis of 95 cotton yarn spinners, which represent 35-40% of industry revenue, it is forecasted that yarn volumes could witness a growth of 4-6% year-over-year in FY2025. This growth is anticipated due to increased capacity utilization and sustained demand, suggesting a promising horizon for the industry.
Profitability and Margin Improvement
The softening of cotton prices is expected to enhance yarn mills' profit margins significantly. Crisil’s report highlights an improvement in cotton yarn spreads to Rs 90-92 per kg in the current fiscal year, up from Rs 87 per kg in the previous year. This improvement is attributed to better domestic cotton availability and continued demand growth in downstream sectors.
For the current fiscal year, analysts are optimistic, predicting an increase in operating margins by 150-200 basis points after a period of historically low margins ranging from 8.5-9% last fiscal.
Future Considerations
While the outlook appears favorable, cotton spinners and market analysts must remain vigilant. Any further downturn in demand from downstream industries like readymade garments, or unfavorable shifts in cotton prices relative to international markets, could pose risks to the anticipated recovery. Moreover, an increase in cotton market arrivals could further boost profitability, making it a key factor to watch in the coming months.
In conclusion, the recent developments in cotton prices and market demand have set the stage for a potential resurgence in profitability for domestic cotton spinners, though the industry must navigate remaining uncertainties and market dynamics carefully.
Read More :> CRISIL Forecasts Improved Operating Margins for Cotton Yarn Spinners
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