ICRA predicts that India's cotton yarn exports will increase by 85-90% in FY2024.

In ICRA's recently published research note on the domestic cotton spinning industry, the rating agency expects demand for the industry to improve by close to 12-14% in volume terms in FY2024 on a yearly basis, with yarn exports likely to increase by a sharp 85% to 90%, on the back of a shift in sourcing preference away from China, and the expectations of demand improving for the spring/summer season in the US and the EU regions, which will drive domestic demand from apparel However, a strong slowdown in cotton prices, leading to lower yarn realisations, is projected to translate into a 9-10% year-on-year (YoY) decrease in revenues to Rs. 33,465 crore in FY2024.

Mr. Jayanta Roy, Senior Vice President & Group Head, Corporate Sector Ratings, ICRA, commented on this: "Despite the increase in cotton yarn volumes, ICRA expects the operating income of Indian cotton spinning companies to decline by 9-10% and operating margins to shrink by 200-240 basis points in FY2024, owing to a significant drop in realisation and lower gross contribution levels. Nonetheless, select businesses' recent addition of in-house power generation capacity is expected to reduce margin constraints in the medium term.

Cotton yarn exports account for 25-35% of India's cotton yarn production, with the domestic market accounting for the remainder. Cotton yarn exports fell sharply (53%) in FY2023, however the trend has reversed in the current fiscal year. 

Overall yarn export volumes climbed by 142% (on a YoY basis) in 7M FY2024 from a low base, with higher exports to China, resulting in a 33% share of exports in overall production, up from 19% in FY2023. According to ICRA, India's yarn exports are expected to expand by ~85-90% YoY in FY2024. Bangladesh, China, and Vietnam account for 60 percent of these exports. 

With Asia accounting for 70% of Indian yarn exports, the ongoing Red Sea conflict is unlikely to have an immediate impact on Indian yarn exports; however, any sustained continuation of this standoff would have a direct impact on apparel export volumes and, as a result, on both domestic and export demand for cotton yarn.

Domestic cotton prices reached a career high in H1 FY2023, but fell significantly in H2 FY2023. 

Cotton prices fell by approximately 25% in the 9th month of FY2024 compared to the average in FY2023, due to a difficult operating environment. Domestic cotton production for CYi20242 is expected to fall by 6%, according to the Textile Commissioner's office, due to a decrease in cotton planted area amid irregular rainfall. 

Cotton prices are projected to rise modestly from their present levels due to lower expected production.

Cotton yarn prices have also been dropping since June 2022, as cotton fibre prices have fallen and downstream garment demand has slowed. Cotton yarn prices are expected to stay down for the balance of FY2024 before increasing marginally in FY2025 as downstream demand picks up.

 The average gross contribution margins for spinners fell considerably by 19% in 9M FY2024 compared to FY2023 due to sluggish domestic demand. Gross contribution margins for spinners fell to a multi-year low in August 2023 before improving by 9% in November. 

Despite a minor increase in gross contribution margins in Q4 FY2024 due to fresh crop arrivals, ICRA expects cotton yarn gross contribution to shrink in FY2024, exceeding FY2023 levels.

While spinners' cash accruals are likely to reduce in FY2024, ICRA anticipates spinner borrowings to decrease as well. 

The capital structure, measured by the total outside liabilities/tangible net worth ratio, is predicted to improve modestly to around 0.5 times in FY2024 (0.6 times in FY2023). 

ICRA predicts that the sector's debt coverage ratios will decrease in FY2024, with the ratio of total debt to operating profit declining to around 3.4 times from 2.6 times in FY2023. "The sector has undertaken large debt-funded capex in FY2022 and FY2023, partially due to the deferral of major capital expenses during the Covid era (FY2020-21). As a result of the reduction in yarn demand in the second half of FY2023, the industry's coverage metrics weakened in FY2023. 

Due to sluggish domestic demand and reduced realisations in FY2024, the spinners have suspended substantial capital plans in the short term. 

Mr. Roy stated that ICRA forecasts a small increase in capex announcements for FY2025, driven by machine modernisation requirements, flow of demand from the China Plus One plan, and recovery in domestic demand from downstream garment companies.

23/02/2024 06:24pm