Operating profits of cotton spinners will double next fiscal as revenue spurts 20-25% on higher sales to Asian buyers and appreciation in cotton yarn prices, a study of 102 of them (including 95 rated by CRISIL), which account for 40% of the industry, shows. Consequently, the credit outlook for cotton spinners, which was negative in the first half of this fiscal, will turn positive next fiscal, as accruals improve and inventory reduces.
"With global demand for knitted garments and home textiles recovering faster than expected due to extended stay-at-home period, and sharper focus on health and hygiene, exports of yarn to China, Bangladesh and Vietnam (which account for over half of India's exports) rose 22%, 39% and 51%, respectively, on-year in April-December 2020 . What has also helped is the US move to ban use of Xinjiang cotton, which has cranked up Indian yarn exports," CRISIL has stated in a press release.
Supplementing exports is the expectation of revival in domestic demand next fiscal owing to recovery in discretionary spending by consumers. Consequently, overall revenues of cotton spinners, which is set to decline 14-16% this fiscal, should rebound next fiscal.
Says Gautam Shahi, Director, CRISIL Ratings, "Capacity utilisation of spinners has also risen from 70-80% in the second quarter this fiscal to ~90% in the third, and is likely to remain high next fiscal, too, which supports revenue. That, and widening cotton and yarn spreads would mean operating margins of spinners would increase 200-250 bps on-year to ~11% next fiscal, and operating profits would almost double."
With demand rising, inventory should decline to typical levels of 2-3 months by the end of this fiscal, from around 4 months a year ago. That would reduce dependence on short-term borrowings.
Says Kiran Kavala, Associate Director, CRISIL Ratings, "The credit outlook for cotton spinners is positive as improving cash accrual and lower working capital debt will burnish debt protection metrics next fiscal. This is significant, considering credit ratio (ratio of number of rating upgrades to rating downgrades) for CRISIL-rated cotton spinners had deteriorated to 0.31 (April 2020 - February 2021), after hovering over 1 time in the past three fiscals.
We expect the credit ratio to improve next fiscal driven by improvement in debt protection metrics such as interest coverage2 and net cash accrual to total debt of cotton spinners estimated to double to over 4 times and 0.25 time, respectively, next fiscal from an estimated ~2 times and 0.12 time, respectively, this fiscal."