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ICRA Rating : Revenue of Indian Cotton Spinning Sector Decline by 25-30% in FY21

Published: July 17, 2020
Author: Millionaires

 

Revenue of Indian cotton spinners is likely to decline by 25-30 per cent year-on-year in 2020-21 due to Covid-19 pandemic-led disruptions in manufacturing activities and weakness in demand in global as well as domestic markets, Icra Ratings said in a report.

 

This will further add to the woes of the sector which saw an estimated 5-7 per cent decline in revenue and 200-250 basis points (bps) correction in operating margins in FY20, it said.

The Indian cotton spinning sector is expected to log a 25-30 per cent y-o-y decline in revenue and a 300-400 bps contraction in operating margins in FY21 amid Covid-19-led disruptions in manufacturing activities, and an all-encompassing weakness in demand from the downstream segments, within as well as outside the country, Icra Ratings said.

 

According to the report, the business outlook appears adverse owing to an inventory pile-up being witnessed across the value chain, which is likely to keep demand from downstream segments subdued over the next few quarters while keeping working capital requirements high.

 

“The main reason for the slow recovery has been the sluggishness in demand in the downstream segments of fabrics and apparel. The trend has been weaker in the domestic market, where consumer-discretionary spending and consumer footfalls in markets remains abysmal, particularly in metros and tier-I markets,” Icra Ratings Senior VP and Group Head Jayanta Roy said.

 

“Yarn, being an intermediate product, is resultantly facing a ripple effect of the contraction in demand in the downstream segments,” he added.

 

The nationwide lockdown, implemented from March 25 onwards to contain the spread of the virus, was officially lifted from the second week of June 2020 with certain guidelines and restrictions.

 

However, even after a month, the operations of spinners have not yet fully ramped up, it said, adding that this is despite the fact that several companies outside containment zones had already commenced operations in April and May after taking requisite approvals from the concerned authorities.

 

Capacity utilisation for most players across the sector is estimated to have averaged at 30-40 per cent in the first quarter of FY21, the report said.

 

With slower than initially envisaged recovery in sales of apparel and home textiles, domestic retailers are deferring new season launches to October-November 2020, which is trickling down to lower offtake for fabrics and yarn.

In contrast, better demand for downstream products in some of the international markets, together with competitive prices for Indian cotton and cotton yarn, are resulting in a relatively better export demand for yarn, Icra said.

 

However, the export demand is not adequate to compensate the sector for the loss in demand in the domestic market, which consumes nearly 70 per cent of the yarn produced in the country, it added.

 

Apart from Covid-19 related concerns, another cause for worry for the Indian spinning sector has been the flare-up witnessed in geo-political tensions between India and China in recent months.

 

While the tensions have since de-escalated to an extent, it remains a key monitorable for the sector, as China has been one of the major export destinations for Indian cotton yarn over the past one decade, accounting for as much as 45 per cent of India’s exports at its peak level (in FY16), the report said.

 

India’s cotton yarn exports to China have declined in the recent years owing to factors like increased competition from countries such as Vietnam and Pakistan, which have a duty advantage over India, and improved local availability of cotton at competitive prices within China, supported by liquidation of state’s cotton reserves.

 

Despite the decline, China continued to account for 25 per cent of India’s cotton yarn exports in FY20.

 

“Based on the prevailing scenario, our estimates of revenues and profitability decline may undergo a further downward revision going forward, depending on the timing and shape of recovery from the pandemic, as the situation remains evolving,” Roy said.

 

“Nevertheless, decline in revenues, as well as profitability, is expected to translate into weaker coverage metrics for the domestic spinners in FY21,” he added.

 

This is, despite the fact that in the past few years, capital expenditure towards capacity expansion by standalone spinning mills has remained low, which has resulted in a steady decline in leverage and repayment obligations for most players across the sector in the recent years, he noted.

 

“Pressure on coverage metrics is likely to be more severe for leveraged companies, having sizable repayment obligations and limited liquidity cushions. We maintain a negative outlook on the cotton spinning sector, given that the pandemic has been a demand-supply disruptor across the textile value chain,” he added.

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