Cotton yarn realisations continued to increase in the current financial year after a sharp increase in FY2022, but a steeper increase in cotton prices, with all-time high levels reported in May 2022, hit the contribution level for the spinners. Besides, the demand has been impacted by the resistance from downstream companies to such high prices, uncompetitive Indian yarn prices in the international market and a slowdown in demand from developed nations amid recessionary concerns. As per ICRA’s recent research report on cotton &manmade yarns, in Q3 FY2023 also, revenues, as well as profitability for Indian cotton spinners are expected to have moderated sequentially due to a slowdown in demand and lower contribution levels. However, the rating agency expects the volumes as well as contribution levels to improve from Q4 FY2023 onwards on the back of some recovery in demand and lower cotton prices with new arrivals. Earlier, Indian cotton spinners had reported robust revenue growth and profitability in FY2022, supported by strong realisations and healthy demand, post the lifting of lockdown restrictions.
Commenting on this, Mr. Jayanta Roy, Senior Vice President & Group Head, Corporate Sector Ratings, ICRA, said, “We expect ICRA’s sample of spinning companies to report a YoY moderation in revenues and profit margins in FY2023. While lower volumes are expected to moderate the revenues, even as realisations are expected to be higher than FY2022, relatively lower contribution levels following higher cotton fiber prices during the year could dent spinners’ profitability for the year. It is, however, pertinent to note that the revenues and profitability are still expected to be higher than the pre-Covid levels of FY2019-FY2020.”
The industry had undertaken high debt-funded capex in FY2022, partly due to the deferment of major capital expenditures during the Covid period (FY2020-21). The trend of incurring debt-funded capex is expected to sustain in the near term for capacity expansions and power-saving enhancements. This, alongside higher working capital requirements and lower margins, is likely to result in some moderation in capitalisation and coverage metrics in FY2023.
While cotton yarn prices have moderated by ~25-30% in the past four months from the peak levels reported in May 2022, with demand coming down and tapering of cotton fiber prices, these continue to be ~10-20% higher than the past five-year average. In CY2022, Indian cotton yarn prices averaged at ~Rs. 351/ kg, which remained ~21% and ~74% higher than CY2021 and CY2020, respectively. ICRA expects continued correction in yarn prices in the coming months, with a gradual softening of the commodity prices and intermittent demand disruptions across the textile value chain.
Cotton prices had also witnessed an upward trend since September 2020, and a steeper increase in fiber prices compared to yarn prices in CY2022 brought down the average spot contribution for the year by ~17% from the exceptionally high levels witnessed in CY2021. Spot contribution in CY2021 averaged ~75% higher than the 10-year average. Nevertheless, despite a moderation in CY2022, the contribution remained healthy, averaging at ~Rs. 119/ kg in CY2022.
On the exports front, after registering all-time highs in FY2022, Indian cotton yarn exports have been declining sharply since April 2022, with uncompetitive Indian prices as well as slowdown in demand in the developed nations. With a sharp surge in cotton prices and ensuing operational disruptions, yarn production also witnessed a ~19% YoY decline and cotton yarn exports plunged 61% YoY in 7M FY2023.
Commenting on this, Mr. Sahil Udani, Assistant Vice President & Sector Head, Corporate Sector Ratings, ICRA, said, “Indian cotton yarn exports fell in 7M FY2023 due to uncompetitive cotton and cotton yarn prices and slowing foreign demand. Besides, Bangladesh had overtaken China in FY2022 to become the largest export market for Indian cotton yarn. The trend continued in 7M FY2023, accounting for ~44% share in India’s cotton yarn exports, compared to ~3% by China. Prior to this, China had remained the largest export market for Indian cotton yarn till FY2021, despite a moderation in its share in recent years.”
The domestic arrivals of the cotton crop in the market till November 2022 for CYi23 have been low compared to previous years due to the damage to cotton crops, following late monsoons in cotton-growing states and stockpiling by farmers due to unremunerative prices. Uncompetitive cotton yarn prices and a shortage of cotton in the recent months saw a shift in the trade dynamics with Vietnam, with Vietnam’s status having changed from being the net exporter to the net importer in recent months.