Icra maintains negative outlook on cotton spinning sector

Ratings agency Icra on Wednesday said it is maintaining negative outlook on the cotton spinning sector amid uncertainty over the extent and duration of the coronavirus outbreak.

It added that operating profitability for the domestic spinning sector in FY20 is expected at multi-year lows, closer to the level last witnessed in FY12, when most players suffered sizeable losses on inventory due to a steep unexpected correction in cotton prices.

"With no meaningful recovery in sight and continued uncertainty on the extent and duration of the impact of the coronavirus outbreak, we are maintaining the 'negative' outlook on the cotton spinning sector assigned in August 2019," Icra Senior Vice-President and Group Head, Corporate Sector Ratings, Jayanta Roy said.

"Even though domestic cotton fibre prices continue to be competitive vis-a-vis international cotton prices at present with a price spread of 4 per cent (reduced from 9 per cent in Feb-20), a further correction in international cotton prices amid demand-side uncertainties could render domestic spinners uncompetitive in the international markets, similar to the situation which was witnessed in H1 FY20," Roy added.

The domestic cotton spinning industry is highly dependent on exports, especially to China where 30 per cent of the cotton yarn produced in the country is exported, Icra said.

China has accounted for nearly one-third of the shipments in recent years, it added.

The outbreak of the coronavirus in China and the consequent lockout in parts of the country has resulted in a shutdown of production units in India, trickling down to lower demand for the yarn.

The resultant correction in realisations, even as cotton prices have remained relatively stable on the back of scaled-up market interventions by the Cotton Corporation of India (CCI), are expected to contract spinners' contribution margins again, compared to the previous three months.

Movement in domestic cotton prices contrasts with the international trend wherein uncertainties on demand have resulted in a sharper correction in cotton fibre prices in recent weeks, Icra added.

As for the performance of the Indian cotton spinning industry, it has already been severely constrained in the current fiscal amid multiple headwinds, including a demand slowdown in the domestic as well as export markets and unfavourable raw material prices, Icra said.

While the industry was pinning hopes on a gradual recovery in cotton yarn exports from Q4 FY20 onwards, aided by softening of domestic cotton prices, the recent developments could prolong tough times for the domestic spinners, it added.