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The cotton spinning sector is in for a tough year ahead with an expected 25-30 per cent fall in revenue and 3-4 per cent drop in operating margins this fiscal amid Covid-led disruptions in manufacturing activities.
This apart, weak demand in downstream segments such as fabrics and apparels will take a further toll on the sector.
The concerning trend in the sector follows an estimated 5-7 per cent slide in revenue and 2.50 per cent dip in operating margins last fiscal.
Inventory pile-up
Per an ICRA note, the business outlook appears adverse due to an inventory pile-up across the value chain, which is likely to keep demand from the downstream segments subdued and working capital requirements high over the next few quarters.
Jayanta Roy, Senior Vice-President, ICRA Ratings, said the trend has been weak in the domestic market, where consumer discretionary spending and consumer footfalls in markets remain abysmal.
A month after the national lockdown was lifted, spinning mills’ operations have not yet fully ramped up. This is despite the fact that several companies outside the containment zones had already commenced operations in April and May. Capacity utilisation for most players across the sector was at 30-40 per cent in June quarter.
Export market
In contrast, better demand for cotton yarn in the international markets, together with competitive prices of cotton in India are resulting in better export. However, the export demand is not adequate to compensate for the loss in demand in the domestic market, which consumes nearly 70 per cent of the yarn produced in the country.
Apart from Covid, the geopolitical tensions between India and China is a major concern for the industry. Despite duty advantage given to Vietnam and Pakistan, export of cotton yarn to China accounted for 25 per cent of India’s overall exports last fiscal.
Based on the prevailing scenario, Roy said revenues and profitability decline may undergo a further downward revision, depending on the timing and shape of recovery from the pandemic.
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