Cotton spinners likely to report double-digit growth in revenues in FY22

Indian cotton spinners are likely to report double-digit revenue growth and all-time high profits in 2021-22, mainly driven by high demand and realisations, according to a report.

While the growth is primarily being led by all-time high realisations, which have sustained for much of the year, volumes are also estimated to be better than the pre-COVID levels, the report said.

Besides recovery in domestic order, robust growth in export demand has also supported volumes, it added.

Large and mid-scale spinning companies are expected to report robust double-digit growth in revenues and all-time high profits in FY22, with 400-600 bps improvement in operating margins, Icra Ratings said in the report.

Companies, which had higher stocks of lower-cost cotton from the previous season, benefitted more in terms of profitability in H1 FY22.

This apart, the inclusion of all cotton yarn exports under Remission of Duties and Taxes on Exported Products (RoDTEP) scheme from January 2021 onwards (as notified in August 2021) has also supported margins as well as price competitiveness of domestic spinners in the international markets, Icra Senior Vice President and Group Head, Corporate Sector Ratings, Jayanta Roy said.

Meanwhile, the report stated that the slight decline in December 2021 aside, cotton yarn prices remained on a rising trend in the current fiscal, touching all-time highs in recent months.

In 9M FY22, Indian cotton yarn prices averaged 36 months higher than FY21.

On the exports front, following a 5 per cent growth in FY21 despite the pandemic impact, India's cotton yarn exports surged 47 per cent year-on-year in H1 FY22, led by a 130 per cent year-on-year increase in exports to Bangladesh.

Icra expects Indian cotton yarn exports to be at all-time highs in FY22, breaching the previous high recorded in FY14.

"Besides competitive Indian cotton and cotton yarn prices in the international markets, concerns raised by large buying regions, including the US and the EU, on Xinjiang cotton and healthy growth in Bangladesh's apparel exports are driving export demand.

While China remained the largest export market for Indian cotton yarn till FY21 despite a moderation in its share in recent years, Bangladesh has overtaken China this year, accounting for 40 per cent share in H1 FY22," Icra Vice President and Sector Head, Corporate Sector Ratings, Nidhi Marwaha noted.

Icra Ratings expect this demand to sustain for the next 9-12 months at least, she added.

Even as the risk of subsequent pandemic waves remains, Icra expects domestic spinners to sustain healthy volumes in FY23 as well, amid a shift in preference away from Xinjiang cotton and competitive domestic cotton prices.

However, prices are expected to taper as cotton yarn realisations remain unsustainable at current levels, which may affect demand, it said.

This, in turn, would result in some moderation in performance in FY23 from FY22 levels, with turnover likely to correct by 10-15 per cent, though remaining higher than the pre-pandemic levels, said the report.

Despite moderation from FY22 levels due to a possible decline in realisations, Icra expects spinners' business performance to remain healthy and better than the pre-COVID levels in terms of scale as well as profitability in FY23. Considering this, the outlook for the sector is positive, Marwaha added.