Operating margin of Indian cotton yarn spinners is expected to shrink by 200 to 400 basis points in fiscal 2020. Higher domestic cotton prices compared with international prices during April to October 2019, a sharp fall in exports, mainly to China and Pakistan, and the resultant domestic oversupply would lead to the squeeze. Mid- and small-sized spinners (having spindles less than 20,000) are likely to be impacted the most, as shrinking revenues and lower margins will impact cash generation. Also, their balance sheets are not as strong as some of the large players, which will impact credit metrics.

While domestic demand is expected to grow three or four per cent this fiscal, supply has been higher because of lower exports. The United States-China trade war has impacted demand for yarn in China, while India has banned yarn exports to Pakistan. China and Pakistan (accounting for 35 per cent and five per cent of yarn exports, respectively, in fiscal 2019) have reduced imports from India by 50 per cent to 60 per cent this fiscal. As a result, exports in the first seven months of fiscal 2020 are lower by around 38 per cent leading to higher domestic inventories and pressure on spreads.