Operating profitability1 of cotton yarn spinners will plunge 250-350 basis points from ~10-10.5% last fiscal to decadal lows of 7-8% this fiscal, due to shrinking spreads2 between cotton and cotton yarn (chart 1 in annexure), inventory losses and slower than expected pickup in downstream demand. Revenue, too, will fall 13-15% due to sharply lower realizations, even though volume is expected to grow at 10-12% this fiscal on a low base of last fiscal.
Yet credit profiles of the spinners will remain largely resilient owing to deleveraged balance sheets and modest capital expenditure (capex) plans, even as lower cash accrual will moderate their debt protection metrics. An analysis of 88 cotton yarn spinners, which account for 35-40% of industry revenue, indicates as much.
Since raw cotton comprises ~60% of total manufacturing cost, cotton-yarn spreads dictate the profit margins of spinners.
Says Gautam Shahi, Director, CRISIL Ratings Ltd, “Cotton-yarn spreads are expected to hover around Rs 75-80 per kg this fiscal from super-normal level of Rs 100 per kg seen for most of last fiscal, because of a sharper fall seen in yarn prices compared to cotton prices in the first half of this fiscal. This is due to lower-than-expected pick-up in domestic demand for readymade garments this fiscal, especially in the knitted and denim segments. Better offtake of woven garments supported by return-to-office and rise in business and leisure travel, though, will partially offset this trend.
Says Pranav Shandil, Associate Director, CRISIL Ratings Ltd, “Though the credit metrics of cotton yarn spinners will moderate this fiscal with weakened operating performance, it will remain resilient on the back of deleveraged balance sheets and modest capex plans. Interest coverage4 ratio of the sample set will weaken to 3.1-3.2 times this fiscal from 5.1 times last fiscal, but gearing5 is likely to remain stable at around 0.6 time as on March 31, 2024.”