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Indian Cotton Spinning Sector to Grow 12-14% in FY24

BULETIN TEKSTIL.COM/ Jakarta -ICRA (Infection Control Risk Assessment) predicts that in the fiscal year 2024 (FY24), the cotton spinning sector in India will expand by 12–14%. Due to a shift in supply source preferences away from China and better demand predictions for the spring-summer season in the US and the EU, the country’s yarn exports are expected to expand dramatically by 85 percent to 90 percent. These factors will boost domestic demand from producers of clothing and household textiles.

A noteworthy deceleration in cotton prices, consequent to diminished yarn realisations, is probably going to cause a 9–10% year-over-year (YoY) decline in revenue to around ₹33,465 crore (one crore rupee is equivalent to 2.06 billion rupiah) in FY24.

About 25–35 percent of India’s total cotton yarn production comes from exports; the remaining portion comes from the domestic market. The current fiscal year has seen a reversal of the trend in cotton yarn exports, which saw a steep drop of 53% in FY23. According to a press release from ICRA, the overall yarn export volume increased by approximately 142% (YoY) in the first seven months of fiscal year 2014 (7M FY24) on a low base. This growth was attributed to an increase in exports to China, which caused the share of exports in overall production to rise from 19% in FY23 to approximately 33% in 7M FY24.

ICRA projects that India’s yarn exports will rise by about 85–90% YoY in FY24. Roughly 60% of these exports come from China, Vietnam, and Bangladesh. Given that around 70% of India’s yarn exports come from Asia, the ongoing Red Sea conflict is not expected to have an immediate effect on the country’s yarn exports. However, any extension of the conflict will directly affect the amount of apparel exported as well as the realization of domestic and international demand for cotton yarn.

In the first half of FY23 (H1 FY23), domestic cotton prices hit an all-time high, but they continued to fall in H2 FY23. A poor operating climate caused prices to drop by approximately 25% for 9M FY24 when compared to average cotton prices in FY23. The textile commissioner’s office projects that decreased cotton cultivation area combined with irregular rainfall will result in a 6% decrease in domestic cotton production for the calendar year 2024 (CY2024). Because output expectations have been lowered, a modest increase in cotton prices from current levels is anticipated.

Since June 2022, cotton yarn prices have also been declining due to declining cotton fiber costs and a slowdown in demand from clothing manufacturers downstream. According to ICRA, cotton yarn prices will stay low for the remainder of fiscal 2018 and will only modestly rise in fiscal 2019 due to rising demand from businesses downstream. Due to sluggish domestic demand, the average gross contribution margin for spinners fell dramatically by 19% in 9M FY24 compared to the same period in FY23.

August 2023 had the lowest gross contribution margin for spinners in recent memory, and November 2023 saw a 9 percent gain. Despite a little increase in the gross contribution margin in Q4 FY24 due to the introduction of new crops, ICRA anticipates a decline in the gross contribution of cotton yarn in FY24 when compared to FY23 levels.

ICRA anticipates a reduction in spinner loans in FY24, in addition to a decline in cash accruals from spinners. Given the lower cotton prices and the lack of significant capital investment plans, the company’s capital structure will probably improve due to lower debt levels and lower working capital requirements. It is anticipated that the capital structure, as measured by the ratio of total external liabilities to tangible net worth (0.6 times in FY23 to roughly 0.5 times in FY24), will marginally improve. ICRA anticipates that the sector’s debt coverage ratio will deteriorate in FY24, with the overall debt to operating profit ratio dropping to about 3.4 times from 2.6 times in FY23, as a result of the absolute decline in OPBITDA.

“ICRA estimates that operating revenues of Indian cotton spinning companies will decline by 9-10 per cent and operating margins will shrink by 200-240 bps in FY24 amidst a significant decline in realization and lower gross contribution rate,” stated Jayanta Roy, senior vice president and group head of corporate sector ratings at ICRA, “despite an increase in cotton yarn volumes.” In the medium run, meanwhile, the internal power generation capacity that some players have lately built is probably going to lessen margin pressure.

“The sector deferred important capital costs during the COVID period (FY21), which contributed to the industry’s large debt-funded capital expenditure in FY22 and FY23. As a result, industry coverage indicators deteriorated in FY23 due to a decrease in yarn demand in H2 FY23. In the short term, spinners have halted substantial capital expenditure plans because to a lackluster domestic demand and decreased realization in FY24. ICRA does, however, anticipate a slight increase in capital expenditure announcements for FY25, driven by the need to modernize machinery, demand flows from the China Plus One program, and higher domestic demand from the clothing industry.

(Red B-Teks/Ly)

ICRA (Infection Control Risk Assessment)

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