After a year of turmoil last fiscal, the cotton yarn spinning industry is expected to witness a breather this fiscal. Operating margins of cotton yarn spinners are set to improve by 150-200 bps this fiscal after hitting decadal lows of 8.5-9% last fiscal.

In fiscal 2024, profitability was affected by lower cotton yarn spreads¹ and inventory losses. This fiscal, however, holds better promise. Stable cotton prices due to better availability of cotton during cotton season 2024 and improved cotton yarn spreads this fiscal will support improvement in margins.

Revenue, too, will spin up 4-6% this fiscal, driven by moderate growth in downstream demand amid stable yarn prices, after a 5-7% decline last fiscal due to a sharp reduction in yarn prices.

Credit profiles, which were impacted by lower cash accrual last fiscal, will also improve with better operating performance and moderate capex on deleveraged balance sheets.

An analysis of 95 cotton yarn spinners, which account for 35-40% of the industry revenue, indicates as much.

Says Gautam Shahi, Director, CRISIL Ratings Ltd, “Better availability of domestic cotton and continued downstream demand growth will drive recovery in cotton yarn spreads to Rs 90-92 per kg this fiscal from ~Rs 87 per kg last fiscal (Chart 1 in annexure). The improvement was already visible in the second half of fiscal 2024 as higher cotton arrivals resulted in normalisation of cotton prices, thereby improving the margins of spinners. With cotton prices expected to stay benign and likely to remain below international prices, the operating margin is expected to recover 150-200 bps to 10.5-11% this fiscal.”

On the revenue front, while yarn prices are expected to remain flat, domestic sales volume, which forms 70-75% of the industry pie, is set to grow 4-6% this fiscal, backed by orders from key end-user segments – readymade garments and home textiles. However, exports, which staged an exceptional recovery last fiscal with 80-85% growth, are likely to grow only 3-4% this fiscal, given sluggish global economic growth. With recovery in demand and operating performance, capacity utilisation level for the industry has reached 80-85% and is expected to improve further this fiscal.

Says Pranav Shandil, Associate Director, CRISIL Ratings Ltd, “However, capex for cotton yarn spinners will remain moderate over the near term as they recover from lows of last fiscal, thus obviating the need for significant debt additions on already deleveraged balance sheets. As a result, interest coverage² ratio is expected to improve to 5-5.5 times this fiscal from ~4 times in fiscal 2024. Gearing³, too, is expected to improve moderately to 0.55 time from 0.64 time.”

However, any further slowdown in demand from the downstream segments (such as readymade garments), and any adverse movement in domestic cotton prices vis-à-vis international prices in the near term will bear watching.

¹ Cotton yarn spreads refer to the difference between the prices of raw cotton (average of domestic and international cotton prices) and domestic cotton yarn
² Interest cover = Earnings before interest, tax, depreciation and amortisation (Ebitda) by finance cost
³ Gearing = Total debt divided by networth