Good days lie ahead for large and mid-scale spinning companies with their profits expected to reach all-time high in FY2022. Revenues of these companies are expected to grow in double digits while operating margins are expected to enhance by 400-600 bps as per an ICRA report. Strong demand and realizations boosted the operating profits of Indian cotton spinners in the last four quarters. Even as cotton fiber prices increased, domestic demand recovery and a strong export growth also supported volumes.
Companies with low-cost cotton stock boomed
Jayanta Roy, Senior Vice President & Group Head, Corporate Sector Ratings, ICRA, says, companies having huge stocks of low-cost cotton from the last seasons recorded more profits in H1 FY2022. Their profit margins also surged on the inclusion of all cotton yarn exports under Remission of Duties and Taxes on Exported Products (RoDTEP) scheme from January 2021 onwards, and price competitiveness of domestic spinners in international markets.
Cotton yarn prices continued to rise in the current fiscal, touching all-time high in recent months. They averaged 36 per cent higher than FY2021 in the first nine months of FY2022. This led to average spot margins for the first nine months of FY2022 reaching decadal highs.
Exports to reach all-time high in FY2022
Despite the effects of pandemic, cotton yarn exports surged by 47 per cent year on year in H1 FY2022 as exports to Bangladesh increased by 130 per cent year on year. Exports are expected to reach all-high time high in FY2022, predicts ICRA.
Nidhi Marwaha, Vice President & Sector Head, Corporate Sector Ratings, ICRA, opines, most of this growth will be driven by concerns raised by large buying regions, including the US and EU on Xinjiang cotton and healthy growth in Bangladesh’s apparel exports. Competitive Indian cotton and cotton yarn prices in the international markets will help drive up demand. Exports to Bangladesh, which overtook China as the largest importer of Indian cotton in FY2022, are expected to sustain for the next 9-12 months at least, says ICRA.
Healthy volumes to maintain price-competitiveness
In FY2023, domestic spinners are expected to sustain healthy volumes as prices will remain competitive and buyers’ preferences will shift from Xinjiang cotton. However, unsustainable realizations are expected to impact yarn prices, affecting demand. This would limit the industry’s performance in FY2023 to moderate levels with turnover correcting 10-15 per cent. The operating margins of the sector are also expected to decline during the year though remaining 100-200 bps higher than the past three-year average.
In terms of scale and profitability, spinners’ performance is expected to surge past pre-COVID levels, encouraging ICRA to accord a positive outlook to the sector, says Marwaha.
Improvement in capitalization and coverage metrics expected
ICRA expected, capex activity in the cotton spinning segment has surged on improved capacity utilization and greater financial flexibility. Mid-scale and large players have announced investments in de-bottlenecking, as well as margin-accretive/ efficiency improvement projects such as machinery upgradation and renewable power capacity additions. However, as debt-funded capex is expected to surge, spinners’ capitalization and coverage metrics are expected to improve from the past few years as revenues and profits are also expected to surge.