Despite an expected drop of 3-5% in price realisation, polyester yarn makers will see operating profitability1 improve 100 basis points (bps) on-year to reach the steady-state level of 8-8.5% next fiscal.
The improvement comes after a sharp decline of ~400 bps in operating profitability estimated for the current fiscal to ~7.5%, on a high base of fiscal 2022 when decadal-high spreads2 had shored up profitability. It will be driven by reduced imports from China following easing of pandemic curbs, lower raw material prices, increased price discipline with consolidation in industry, and continued healthy domestic demand.
Better profitability, coupled with modest capital expenditure, will keep the credit profiles of polyester yarn manufacturers stable next fiscal, a CRISIL Ratings analysis of 20 players (accounts for about 40% of sector’s revenue) indicates.
Says Gautam Shahi, Director, CRISIL Ratings, “Sharp increase in imports of polyester yarn from China has impacted the spreads2 this fiscal. Imports (in volume terms) from China increased 29% on-year (April-December 2022) due to sudden decline in Chinese domestic demand owing to Covid-19 related curbs. Next fiscal, domestic consumption in China will normalise, leading to lower threat of cheaper imports from that country. Consequently, we expect operating profitability1 of Indian polyester yarn makers to improve by 100 bps (on-year) to 8-8.5% next fiscal.”
Prices of purified terephthalic acid (PTA) and mono-ethylene glycol (MEG), which are crude oil derivatives and account for 80% of the raw material cost of polyester yarn manufacturers, are expected to moderate next fiscal due to an expected moderation in average crude oil prices. Moreover, PTA capacities in India are expected to increase 15-20% over next fiscal, which will enhance raw material availability and keep prices in check.
Further, the industry has seen consolidation over the past few fiscals, with as much as 20% of the total capacity acquired by large players, and this has improved price discipline in the sector.
Says Sushant Sarode, Director, CRISIL Ratings, “Consolidation in the industry, coupled with a favourable demand-supply situation, will mean lower moderation in prices of polyester yarn compared with that for raw materials. In addition, domestic demand for polyester yarn will be healthy, given a growth outlook of 8-10% for the domestic ready-made garments segment and an expected recovery in demand for home textiles next fiscal. As such, polyester yarn is a cheaper substitute for cotton yarn and increasing polyester blending will continue to drive healthy demand for polyester yarn makers.”
Consequently, revenue growth next fiscal is estimated at 5-8% despite an expected drop of 3-5% in price realisation, supported by a favourable demand-supply situation.
The sector is expected to incur modest capacity addition (6-7% of the capacity) next fiscal, while working capital is expected to remain stable with decline in realisation. Moderate debt-funded capex by select manufacturers, albeit with better cash generation and gradual debt repayment, will ensure stability in credit profiles of polyester yarn manufacturers over the next few fiscals. Interest coverage3 and gearing4 are expected to remain healthy at 5.5-6.0 times and ~0.5 time, respectively, next fiscal, compared with ~6.5 times and ~0.45 time, respectively, this fiscal.
That said, volatility in crude oil prices and any further lockdown in China impacting the demand-supply situation will remain key monitorables.
1 Operating profitability is the same as earnings before interest, tax, depreciation and amortisation (Ebitda) margin
2 Spreads refers to the difference between price of raw material (PTA price*0.885 + MEG price*0.335) and the price of polyester yarn (partially oriented yarn - POY)
3 Interest coverage = Operating profit before depreciation, interest and tax / Interest and finance charges
4 Gearing = Adjusted total debt / Adjusted networth
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