India’s cotton yarn exports are projected to experience a substantial increase of 85% to 90% in the fiscal year 2024 (FY2024), according to a recent report by ICRA, a leading credit rating agency. Despite the surge in export volumes, operating margins for Indian cotton spinning companies are anticipated to decline by 200-240 basis points (bps) due to lower realizations and reduced gross contribution levels.
ICRA forecasts a 12-14% annual rise in demand for the domestic cotton spinning industry in FY2024, driven by an expected shift in sourcing preference away from China. The surge in yarn exports is attributed to increased demand for the spring/summer season in the US and EU regions. However, a significant slowdown in cotton prices is likely to lead to a 9-10% year-on-year drop in revenues, estimated at approximately Rs. 33,465 crore in FY2024.
Jayanta Roy, Senior Vice President & Group Head of Corporate Sector Ratings, ICRA, commented on the projections, stating, “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 bps in FY2024 amid a significant drop in realization and lower gross contribution levels. Nevertheless, in-house power generation capacities recently added by select players are likely to alleviate margin pressures in the medium term.”
Cotton yarn exports typically constitute around 25-35% of India’s cotton yarn production, with the remaining portion serving the domestic market. After a steep 53% decline in cotton yarn exports in FY2023, there has been a reversal in the current fiscal year. In the first seven months of FY2024, overall yarn export volumes grew by approximately 142% on a year-on-year basis. The share of exports in the overall production increased from 19% in FY2023 to around 33% in 7M FY2024, with Bangladesh, China, and Vietnam accounting for approximately 60% of these exports.
While domestic cotton prices reached a lifetime high in H1 FY2023, they steadily declined in H2 FY2023. For the first nine months of FY2024, prices further decreased by around 25%, attributed to a weak operating environment. The Textile Commissioner’s office estimates a 6% reduction in domestic cotton production for CY2024 due to a decrease in sown area amid uneven rainfall.
ICRA expects cotton yarn prices to remain soft for the remainder of FY2024 and increase marginally in FY2025 as demand from downstream companies picks up. Despite a decline in gross contribution margins in 9M FY2024 compared to FY2023, ICRA estimates cotton yarn gross contribution to contract in FY2024 over FY2023 levels.
The report anticipates a decline in cash accruals for spinners in FY2024, but a corresponding decrease in borrowings due to lower capital expenditure and working capital requirements. The industry’s capital structure is expected to improve marginally in FY2024, with the total outside liabilities/tangible net worth ratio estimated at ~0.5 times.
Roy concluded by stating, “The industry had undertaken high debt-funded capex in FY2022 and FY2023, partly due to the deferment of major capital expenses in the Covid period (FY2020-21). Due to weak domestic demand and lower realizations in FY2024, the spinners have halted major capex plans in the near term. ICRA, however, expects a marginal pick-up in capex announcements for FY2025, driven by modernization requirements of machinery, flow of demand from the China Plus One scheme, and improvement in domestic demand from downstream apparel companies.”
