Mumbai : Revenues of cotton spinners are set to decline 30-35% in the current fiscal, a six year low, because of tepid domestic and export demand following the Covid-19 pandemic. This along with inventory losses and lower profitability is expected to result in moderation in credit quality of cotton spinners this fiscal, a study of 150 CRISIL rated firms shows.
Domestic demand for cotton yarn, which accounts for over 70% of overall demand, has been impacted because of slack in end-user segments such as readymade garments (RMG) and home textiles, CRISIL said.
Cotton yarn exports, too, have been materially affected because of fewer orders from China and Bangladesh, which account for over half of India’s exports. Revenue from exports had already wound back by a third last fiscal, with China increasing procurement from other countries, predominantly Vietnam.
The decline in yarn offtake since Covid-19 afflictions began in February 2020 has meant the current fiscal began with higher inventories of 4-4.5 months compared with 3-3.5 months on average in the past two fiscals. With demand likely to revive only from the second half of this fiscal, inventories will remain high in the first half.
Says Hetal Gandhi, Director, CRISIL Research, “Cotton spinners are facing a double whammy of sharp erosion in revenue and inventory losses. Revenues of the domestic industry, which had fallen last fiscal, is set to slip again and touch a six-year low. Additionally, inventory losses loom because cotton prices have declined 10-15% on a sequential basis in the first quarter of the current fiscal.”
With yarn prices falling more than cotton prices, cotton-yarn spread is seen narrowing down to Rs 75-80 per kg this fiscal versus Rs 80-85 per kg last fiscal, which will contract operating margins by 350-400 bps, the study added.