Indian cotton yarn industry is likely to witness a decline in revenue and moderation in profit margins in the short-term due to weak demand and shutting of manufacturing units following the COVID-19 pandemic, according to Care Ratings.
Following shutdown of manufacturing units and weak downstream demand in both domestic and export markets expected in the near-term, the cotton yarn industry is staring at extremely challenging next two quarters, the rating agency said in a report.
COVID-19 is expected to lead to drop in revenue along with moderation in profitability margins and debt coverage indicators apart from impacting the liquidity profiles of most of the companies engaged in the sector, it added.
Smaller companies with high debt levels, limited access to bank funding and limited liquidity buffer are expected to be impacted the most compared with their larger counterparts, the report said.
The Indian cotton spinning industry, which was already facing multiple headwinds such as low demand, unfavourable duty structure and fluctuating cotton fibre prices, is now confronted with yet another challenge in the form of COVID-19 pandemic, it said.
Facing lean demand since 2014-15, with intermittent spells of good periods, the Indian cotton yarn industry was expecting a change of fortune in 2019-20.
The estimate of bumper crops in the cotton season of 2019-20 was expected to bring respite to the sector, it said.
The benefit, which was anticipated to come from lower fibre prices, is now expected to be more than offset by the fresh set of challenges brought in by COVID-19 outbreak.
The report said that since the last few years, Indian cotton yarn spinners have been jostling with various headwinds including subdued export and domestic demand coupled with fluctuating cotton fibre prices.
Cotton yarn exports over the last few years have taken a hit, mainly on account of subdued demand from China (largest contributor to India's cotton yarn export), it added.
After more than doubling in FY13 (in volume terms) and increasing by more than 50 per cent in the subsequent year (on a higher base), the yearly shipments to China in FY17 slumped by more than 25 per cent from FY14 level.
Though exports to China increased by around 47 per cent in FY19 over FY18, it declined significantly by 43 per cent in the first 10 months of FY20 on a year-on-year basis, it said.
China's major cotton yarn demand is now being catered to by Vietnam, which enjoys duty-free access to China.
In the last few years, Chinese companies have invested heavily in Vietnam to expand their spinning capacities, leveraging low labour cost along with favourable trade agreements.
In 2019, China also allowed Pakistan to supply 3,50,000 tonnes of yarn at zero duty, while there is a duty of 3.5 per cent for Indian cotton yarn.
Further, the report said that average monthly exports of cotton yarn stood at Rs 1,616 crore during the first 10 months of FY20, significantly lower than the monthly average of Rs 2,278 crore witnessed in the same period last year.
Indian cotton fibre prices remained firm, especially in the first quarter of FY20, contrary to the international cotton prices, which made domestic cotton yarn spinners less attractive in the export market, it added.
In addition to lower exports, demand for cotton yarn from the domestic apparel industry has also remained muted in the recent past.
After witnessing a decline in two consecutive years (FY18 and FY19), apparel exports remained almost flat in the first ten months of FY20 as compared with the same period last year.
Domestic demand for apparels has also remained subdued during this period, it added.
The last quarter of the financial year (January-March), which is usually the best quarter for the Indian cotton spinners, was expected to bring some cheer in the form of better spreads and better profitability margins due to lower cotton prices, and start the recovery process for the industry, the report said.
However, with COVID-19 pandemic leading to shutdown of manufacturing facilities and retail outlets in India and abroad, along with supply chain disruptions at various places, domestic spinners are staring at a long recovery road ahead, it added.
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