Ind-Ra: FY19 Textile Outlook Lower Cotton Prices and Demand Recovery to Support Sector Profitability

India Ratings and Research (Ind-Ra) has maintained a stable outlook for cotton textiles and synthetics for FY19. This is in view of expected margin expansion due to softening in cotton prices, improved consumer spending outlook in key user countries and the low base effect of FY18. The slowdown in domestic demand growth for textiles, due to demonetisation and the goods and services tax (GST) implementation, seems to have bottomed out in 2HFY18. Better margins, modest reduction in working capital requirements and subdued capex in FY19 will lead to an improvement in the overall credit profile.

The outlook, however, is constrained by the possible impact of pink bollworm on cotton output and prices, and increasing crude prices on synthetics.

A higher-than-expected rise in cotton acreage at 19.0% and a consequent 11.0% increase in crop production in FY17-FY18 are likely to moderate cotton prices in FY19, although domestic cotton prices increased in the last few months due to the pink bollworm issue. The global stock-to-use ratio for cotton, excluding China, increased to 56.0% in FY18 from 47.0% in FY17, although Chinese inventory declined 17% yoy.

An increasing crude price is likely to narrow the spread between cotton and synthetic yarns, thereby moderating the pace of switch to synthetics from cotton textiles. Operating margins of synthetics manufacturers may witness volatile margins due to fluctuations in crude price and delays in passing on cost inflation. However, these challenges are likely to be countered by improved demand growth on a year-on-year basis and operating leverage benefits.

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