Credit outlook for India’s cotton spinners positive despite capex, says CRISIL

Healthy cash accruals, supported by better-operating profits, and deleveraged balance sheets will keep the credit outlook positive for cotton spinners, despite higher planned capital expenditure (capex) and working capital requirements.

Higher spreads1 between cotton and cotton yarn (refer annexures), together with buoyant domestic and export demand, and increased capacity utilisation levels, will push up the operating profitability of cotton-yarn spinners to a 10-year high, of 20-23%, this fiscal.

In fiscal 2023, operating profitability is expected to moderate to 15-18% due to a more balanced demand-supply situation, and higher input (cotton) prices, but will still remain above the pre-pandemic level of 12-14%.

An analysis of 98 cotton yarn spinners (accounting for 35% of the sector’s revenue) rated by CRISIL Ratings indicates as much.

Revenue of cotton spinners will grow over 35% this fiscal, on a low base and 10-15% next fiscal, supported by buoyant domestic demand. Besides, export demand is expected to remain healthy continuing to be benefitted from the ban on exports from Xinjiang region in China and competitive domestic cotton prices vis-à-vis international prices.

Domestic demand for cotton yarn has been recovering from the second quarter of fiscal 2022, driven by a pick-up in the downstream readymade garments and home textiles segments. On the other hand, export demand also is healthy, given improved cost competitiveness of domestic spinners, and the China+1 policy following US restrictions on the use of Xinjiang cotton. Hence, cotton yarn prices are likely to continue to be higher, though a slight correction from current peak levels can be expected in near term as the demand-supply imbalance of cotton yarn eases out.

“Operating profitability of spinners is estimated to improve to a decadal high of 20-23% this fiscal compared to historical levels,” said Gautam Shahi, Director, CRISIL Ratings, adding that a bumper cotton harvest last season (October 2020-September 2021) led to an oversupply of cotton in the domestic market and limited the increase in cotton prices.

“On the other hand, yarn prices increased sharply due to buoyant export demand and high international cotton prices,” he said.

That said, since December 2021, cotton prices have begun rising as the cotton crop this season is expected to be lower due to unseasonal rains and will lead to moderation in operating profitability to 15-18% next fiscal.

Also, the capacity utilisation of Indian cotton spinners is estimated to have reached 90-95%. To meet the surging demand, the domestic industry is expected to enhance capacity by 20-25 lakh spindles (5-7% of capacity) annually, thus requiring a capital expenditure of Rs 12000 -15000 crore in each of the next two fiscals, CRISIL said.

“The sector is expected to see higher capex in fiscals 2022 and 2023, after a gap of almost five fiscals. Despite larger capital spend and working capital requirements, gearing2 will remain comfortable at 0.6-0.7 time next fiscal, vis-à-vis 0.5 time in the current fiscal, supported by healthy cash accruals. Credit outlook will therefore continue to remain positive for Indian cotton spinners,” said Sushant Sarode, Associate Director, CRISIL Ratings.

That said, a continuation of the ban on Xinjiang cotton and movement of domestic cotton prices vis-à-vis international prices will be key monitorable.

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