Operating margins for Indian cotton yarn spinners to expand this year: Crisil

Operating margins for Indian cotton yarn spinners to expand this year: Crisil
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New Delhi, India: After a year of turmoil last financial year, the cotton yarn spinning industry is expected to witness a breather this year.

According to a Crisil Ratings report, operating margins of cotton yarn spinners are set to improve by 150-200 basis points (100 basis points is equal to 1 percentage point) this financial year after hitting decadal lows of 8.5-9 per cent last year.

Last financial year, profitability was affected. This fiscal, however, holds better promise, the rating agency said.

Stable cotton prices due to better availability of cotton during cotton season 2024 and improved cotton yarn spreads this fiscal will support improvement in margins.

Revenue, too, will spin up 4-6 per cent this financial year, driven by moderate growth in downstream demand amid stable yarn prices, after a 5-7 per cent decline last financial year due to a sharp reduction in yarn prices.

"The improvement was already visible in the second half of fiscal 2024 as higher cotton arrivals resulted in normalisation of cotton prices, thereby improving the margins of spinners. With cotton prices expected to stay benign and likely to remain below international prices, the operating margin is expected to recover 150-200 bps to 10.5-11% this fiscal," said Gautam Shahi, Director, CRISIL Ratings.

On the revenue front, while yarn prices are expected to remain flat, domestic sales volume, which forms 70-75 per cent of the industry pie, is set to grow 4-6 per cent this fiscal, backed by orders from key end-user segments - readymade garments and home textiles.

However, exports, which staged an exceptional recovery last fiscal with 80-85 per cent growth, are likely to grow only 3-4 per cent this fiscal, given sluggish global economic growth. With recovery in demand and operating performance, capacity utilisation level for the industry has reached 80-85 per cent and is expected to improve further this fiscal.

Pranav Shandil, Associate Director, CRISIL Ratings, said, "However, capex for cotton yarn spinners will remain moderate over the near term as they recover from lows of last fiscal, thus obviating the need for significant debt additions on already deleveraged balance sheets."