The turnover of cotton spinners will contract by 25 to 30% in fiscal year 21: Icra Ratings

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Revenues of Indian cotton spinners are expected to decline 25-30% year-on-year in 2020-21 due to disruption caused by the Covid-19 pandemic in manufacturing activities and weak demand in global markets and national, Icra Ratings said in a report.

This will further exacerbate the industry’s woes, which experienced an estimated 5-7% drop in revenues and a 200-250 basis point (bps) correction in operating margins in FY20, he said. he declares.

India’s cotton spinning industry is expected to experience a 25-30% year-on-year decline in revenues and a 300-400 basis point contraction in operating margins in FY21 due to disruptions caused by Covid-19 in manufacturing activities and widespread weakness in demand. downstream segments, both inside and outside the country, said Icra Ratings.

According to the report, the business outlook appears unfavorable due to a stacking of inventories observed throughout the value chain, which is expected to limit demand from downstream segments in the coming quarters while maintaining the need for funds. high turnover.

“The main reason for the slow recovery has been weak demand in the downstream fabric and clothing segments. The trend has been weaker in the domestic market, where discretionary spending and consumer footfall in markets remains abysmal, particularly in subways and Level I markets, ”said Jayanta Roy, senior vice president and head of Icra Ratings group.

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“Yarn, being an intermediate product, therefore faces a ripple effect of demand contraction in downstream segments,” he added.

The national lockdown, implemented from March 25 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 spinners’ operations have not yet fully ramped up, he said, adding that this was despite the fact that several companies outside the containment zones had already started operations in April and May after obtaining the required approvals from the relevant authorities. .

Capacity utilization for most industry players is estimated to average 30-40 percent in the first quarter of FY21, according to the report.

With a slower-than-expected recovery in apparel and home textiles sales, national retailers are delaying new season launches until October-November 2020, which is reflected in lower sales of fabrics and yarns.

In contrast, better demand for downstream products in some international markets, along with competitive prices for Indian cotton and cotton yarn, translates into relatively better yarn export demand, Icra said.

However, export demand is not enough to compensate the sector for the loss of demand in the domestic market, which consumes nearly 70 percent of the yarn produced in the country, he added.

In addition to concerns related to Covid-19, another cause for concern for the Indian spinning industry has been the surge in geopolitical tensions between India and China in recent months.

Although tensions have since eased to some extent, this remains a key issue for the sector, as China has been one of the top export destinations for Indian cotton yarn for the past decade, accounting for up to ‘to 45 percent of India’s exports at their highest level (in FY16), according to the report.

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

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

“Based on the prevailing scenario, our estimates of declining revenues and profitability could be further downgraded in the future, depending on the timing and shape of the recovery from the pandemic, as the situation continues. to evolve, ”said Roy.

“Nonetheless, lower revenues, as well as profitability, should translate into lower coverage measures for domestic spinners in FY21,” he added.

This, despite the fact that in recent years, investment expenditure for the expansion of the capacities of autonomous spinning mills has remained low, which has resulted in a constant drop in leverage and repayment obligations for most players. industry in recent years, he said. Noted.

“The pressure on hedging measures will likely be more severe for leveraged companies, with large repayment obligations and limited liquidity buffers. We maintain a negative outlook on the cotton spinning sector, as the pandemic has disrupted supply and demand across the textile value chain, ”he added.

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