Latest News | Cotton Spinners' Revenue to Fall 30-35 Pc in FY21 on Tepid Demand: Crisil

Mumbai, Aug 26 (PTI) Revenue of cotton spinners is likely to decline 30-35 per cent to a six-year low in the current financial year due to tepid domestic as well as export demand following the COVID-19 pandemic, according to Crisil Research.

This revenue loss along with inventory losses and lower profitability is expected to result in moderation in credit quality of cotton spinners this fiscal, Crisil Research said in a report.

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"Cotton spinners are facing a double whammy of sharp erosion in revenue and inventory losses. Revenues of the domestic industry, which had fallen last fiscal, is set to slip again and touch a six-year low.

"Additionally, inventory losses loom because cotton prices have declined 10-15 per cent on a sequential basis in the first quarter of the current fiscal," Crisil Research Director Hetal Gandhi said.

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Domestic demand for cotton yarn, which accounts for over 70 per cent of overall demand, has been impacted because of slack in end-user segments such as readymade garments (RMG) and home textiles.

Similarly, cotton yarn exports have been affected because of fewer orders from China and Bangladesh, which account for over half of India's exports, the report said.

Revenue from exports had already wound back by a third last fiscal, with China increasing procurement from other countries, predominantly from Vietnam, it added.

The decline in yarn offtake since COVID-19 disruptions began in February 2020 has meant the current fiscal began with higher inventories of 4-4.5 months compared with 3-3.5 months on an average in the past two fiscals.

With demand likely to revive only from the second half of this fiscal, inventories will remain high in the first half, it noted.

With yarn prices falling more than cotton prices, cotton-yarn spread is seen narrowing down to Rs 75-80 per kg this fiscal compared with Rs 80-85 per kg in the previous financial year.

Operating margin is expected to contract by 350-400 basis points (bps).

Further, the report noted that the working capital cycle has got elongated because of a stretch in receivables following steep business pressure on key end-users such as readymade garment makers, it added.

Overall, Crisil Research expects credit outlook for cotton spinners to remain negative this fiscal.

Most firms are managing the situation by availing moratorium on debt servicing, additional COVID-19 related bank lines, and government measures such as the relief package to micro, small and medium enterprises, the report said.

Additionally, it noted that one-time restructuring of loans announced by RBI will be a viable option amidst tightness in accruals to repayments in current fiscal.

That said, the benefit of continuing soft cotton prices and liquidation of high-cost inventories from the past fiscal should help cotton spinners perform better in the second half of the current fiscal, provided demand limps back, it added.

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