Operating margins of cotton spinners are expected to improve by 150-200 basis points this fiscal after hitting a decade low of 8.5-9 per cent in the last fiscal. via.
The operating margins of Indian cotton spinners could expand by 150-200 basis points in FY25 after hitting a decade low of 8.5-9 per cent, CRISIL Ratings said. In FY24, margins were impacted by lower cotton yarn price differentials and inventory losses. This financial, stable cotton price due to better supply and improved yarn differential will bring more profits.
In FY24, margins were impacted by lower cotton yarn price differentials and inventory losses. However, this financing promises better. The ratings agency said in a release that stable cotton prices due to more abundant cotton supplies in the 2024 cotton season and improved cotton yarn price spreads this fiscal year will support margin improvement.
The cotton yarn gap is the difference between the price of raw cotton (the average price of domestic and international cotton prices) and domestic cotton yarn.
Revenue will also grow 4-6% this fiscal, thanks to moderate growth in downstream demand amid stable yarn prices, after falling 5-7% in the previous fiscal due to sharp fall in yarn prices.
The credit profile, which was impacted by lower cash accumulation in the last financial year, will also improve thanks to better operating performance and moderate capital expenditure on the balance sheet. financial leverage.
An analysis of 95 cotton spinning mills, which account for 35-40% of the industry's turnover, bears that out, CRISIL said.
“Better domestic cotton availability and continued growth in downstream demand will drive recovery in cotton yarn prices to ₹90-92/kg this fiscal from ~₹87/kg last fiscal . The improvement was evident in the second half of FY24 as higher cotton arrivals led to normalization of cotton prices, thereby improving the margins of spinners,” it said Gautam Shahi, director, CRISIL Ratings Ltd.
“With cotton prices expected to stabilize and likely to remain below international prices, operating margins are expected to recover 150-200 basis points to 10.5- 11% this fiscal.”
On the revenue front, while yarn prices are expected to remain unchanged, domestic sales volumes, which account for 70-75% of the industry's market share, are expected to grow by 4-6% this financial year, supported by orders from key suppliers- user segments, i.e. ready-to-wear and home textiles.
However, exports, which had seen an exceptional recovery in the last financial year with growth of 80-85%, are likely to grow only 3-4% this financial year due to global economic growth. slow.
With recovery in demand and operational performance, capacity utilization for the cotton spinning industry has reached 80-85% and is expected to improve further this fiscal.
“However, capex for cotton spinners will remain moderate in the near term as they recover from last fiscal's lows, so there is no need to add significant debt on the balance sheet. capital has been reduced in financial leverage. As a result, interest coverage ratio is expected to improve to 5-5.5 times this fiscal from nearly 4 times in FY24. Shifting gears [total debt divided by net worth]expected to moderately improve to 0.55x from 0.64x,” it said Pranav Shandil, associate director, CRISIL Ratings.
Interest coverage is earnings before interest, taxes, depreciation and amortization (EBITDA) at finance costs.
However, any further decline in demand from downstream segments (such as readymade garments) and any adverse fluctuations in domestic cotton prices vis-a-vis international prices in the near term will need to be monitored, the release added.
Fiber2 Fashion News Desk (DS)
