The rating agency Icra expects demand for the industry to improve by close to ten per cent in volume terms in FY2024 on a yearly basis, primarily gaining through a shift in preference away from Chinese cotton and the expectations of demand improving for the spring, summer season in USA and EU regions.
However, an expected moderation in cotton prices will lead to lower realisations, which is likely to translate to a seven per cent year-on-year (YoY) decline in revenues to Rs. 34,000 crore in FY2024.
Kaushik Das, Vice President and Co-group Head, Corporate Sector Ratings, Icra said, “Despite lower revenues, Icra expects the operating margins of Indian cotton spinning companies to improve by ~50 – 100 bps to 11.5 to 12 per cent in FY2024. The spinners are expected to benefit from the operating efficiencies arising from higher volumes and lower logistics expenses as the blockages at the ports in various regions have started to ease, accompanied by a reduction in container freight rates.”
Nonetheless, profits and cash accruals of spinners are expected to be marginally lower in FY2024 compared to FY2023, Das added.
While the cash accruals of players are expected to decline marginally, it expects the spinners’ borrowings to come down too, in FY2024. The lack of any major capital expenditure plan along with lower working capital requirements, because of the softening in cotton prices, are likely to lower the debt levels and improve the capital structure for companies.
Icra expects the debt coverage ratios for the sector to improve in FY2024 with debt/OPBITDA forecast to ease to 2.2X from 2.4 times in FY2023.
It added that the capital structure, as reflected by the ratio total outside liabilities/ tangible net-worth ratio, is also expected to improve marginally to ~0.5 times in FY2024 (0.6 times in FY2023).
Das added, “The industry had undertaken high debt-funded capex in FY2022, partly due to the deferment of major capital expenses during the Covid period (FY2020-2021). Consequently, with a drop in yarn demand in H2 FY2023, the coverage metrics of the industry deteriorated in FY2023. Due to limited order visibility for FY2024, as of now, the spinners have halted major capex plans for the near term.”
Icra, however, estimated that capex announcements for FY2025 will pick up, driven by the modernisation requirements of machinery, demand flow from the China Plus One movement and demand resumption from EU and North American apparel consumers.
Notably, domestic cotton prices were at a historical high in H1 CY2022 but had declined steadily in H2 CY2022. For 5M CY2023, cotton prices declined further by 20 per cent compared with December 2022, as the new season crop hit the market.
As per the estimates of the office of the textile commissioner, domestic cotton production for CY2023 is projected to increase by 10 per cent on the back of expected higher acreage in Maharashtra and Gujarat.
Icra however noted that the slow progress on the cotton sowing areas in Maharashtra and southern states due to the delayed onset of monsoon. However, as the sowing season extends till July in these regions, Icra expects a pickup with the normalisation of monsoon.
The deficit (on a y-o-y basis) in sowing has already improved from 14 per cent as at the end of June to 11 per cent as on 7 July.
Also, cotton yarn prices have been declining since June 2022 following the softening in cotton fibre prices and subdued demand from downstream apparel companies. the rating agency said that cotton yarn prices are likely to remain steady in the near term and increase marginally in H2 FY2024 as demand from downstream companies picks up.
The average gross contribution margins for spinners had declined sharply (24 per cent) in FY2023 after a steep increase (+27 per cent) in FY2022. The decline in FY2023 was led by high cotton fibre prices and weak demand from downstream companies.
Despite an expected increase in yarn prices in H2 FY2024, ICRA estimates the gross contribution margins of spinners to contract further by five per cent YoY in FY2024 due to an unfavourable relative movement of cotton fibre and yarn prices.
