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Profitability Of Synthetic Yarn Makers Seen Steady At 10%: CRISIL

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Improved yarn prices because of a sharp rebound in demand in the second half of the current fiscal will help maintain the operating profitability of Indian synthetic (polyester1 and viscose2) yarn companies at 10% this fiscal, despite the pandemic effects, CRISIL has stated.

 

A study of 75 CRISIL-rated spinners, accounting for 40% of the industry revenue, indicates this.

Prices of polyester yarn and its key input, purified terephthalic acid (PTA), fell after the onset of the pandemic. But they rebounded in September 2020-January 2021, with the price of yarn rising faster than PTA, thus aiding profitability.

In fact, the spread - or the difference between the price of yarn and its raw material - rose to a three-year high of Rs 26 per kg in the December 2020 quarter.

On the other side, prices of viscose yarn and its raw material input have remained largely steady, supporting spreads. Although some softening in the polyester spreads is expected over the next two quarters, it is still likely to remain higher than that in the corresponding periods of last fiscal as the tide of demand continually rises. This is likely to support operating profitability next fiscal, too.

 

Profitability Of Synthetic Yarn Makers Seen Steady At 10%: CRISIL

Synthetic yarn is used mostly in athletic and leisure (athleisure) wear, and home textiles. Demand from these segments went on a tailspin in the first half of the fiscal, but rebounded sharply thereafter, driven by the 'work-from-home' shift. India's athleisure market worth ~Rs 50,000 crore and home textiles market worth ~Rs 55,000 crore saw a sharp demand recovery owing to health and comfort needs, along with consumer spending on home improvement.

Says Dinesh Jain, Director, CRISIL Ratings Ltd, "Operating rates for synthetic yarn spinners are expected to be in the range of 65-70% this fiscal, even with strong order flows in the second half. But that should not be a concern to spinners, given that the spreads are attractive this fiscal. In fact, the low rates provide spinners enough headroom to absorb additional demand next fiscal, without immediate need to increase capacities."

Overall, the industry is expected see a contraction in volume to 5.5 million tonne this fiscal from 6 million tonne last fiscal. Spinners are expected to mitigate this impact by tightening their working capital cycles, with faster collections and better inventory management.

Says Krishna Ambadasu, Associate Director, CRISIL Ratings Ltd, "By the end of current fiscal, borrowing levels will remain low with spinners maintaining an efficient working capital cycle. Moderate inventory stocking owing to round-the-clock availability of raw materials such as polyester and viscose, and shorter receivables cycle, have helped. That, and limited capital investment needs will keep the capital structure of spinners benign.

Read more about: crisil
Story first published: Thursday, March 25, 2021, 8:14 [IST]
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