Indian cotton spinners to grow 6-8% in FY25 on volume, capex boost; Welspun Living, Nitin Spin lead gains

Cotton stocks extended gains on Tuesday, July 16, after domestic rating agency ICRA lifted the FY25 growth forecast for the Indian cotton spinning industry. The rating agency expects the domestic cotton spinning industry to recover in fiscal 2024-25 (FY25), growing by 6-8 per cent over volume growth and mild realisation gains. 

Leading cotton stocks listed on D-Street extended gains after the robust FY25 growth outlook. Welspun Living gained around three per cent to hit an intra day high of ₹175.15, while shares of Nitin Spinners were locked in nine per cent upper circuit to hit a fresh lifetime high of ₹417.60 apiece on the BSE.

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Cotton spinners to grow 6-8% in FY25: ICRA

According to ICRA, cotton spinners' volume growth is pegged at 4-6 per cent. Over two-thirds of the cotton yarn produced is consumed domestically, and green shoots of recovery are visible in downstream segments such as readymade garments and home textiles.

Exports, which rebounded in FY2024 on a lower base, are likely to normalise in FY2025. While the exports will remain exposed to headwinds from sluggish global demand, a shift in sourcing preference away from other countries will offset this impact.

Domestic cotton prices, which peaked sharply in H1 FY23 and reached a lifetime high of Rs. 284 per kg, have declined over the last two years. The average prices, which fell by ~26 per cent YoY in FY24 amid moderation in global prices and weak demand from the end-user segments, may rise in the near term with a recovery in demand and an expected reduction in the cotton sown area. 

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Cotton yarn prices, too, have been declining since June 2022 amid softening cotton fibre prices and slowing demand from the downstream segments. ICRA expects cotton yarn prices to rise marginally in FY25 and remain exposed to demand vagaries.

“The operating income of Indian cotton spinning companies is estimated to improve by 6-8 per cent in FY25 with a recovery in domestic demand and marginal rise in yarn realisations,'' said K Srikumar, Senior Vice President & Co-Group Head, Corporate Sector Ratings, ICRA.

‘’The gross contribution margins for spinners, which contracted sharply by ~20 per cent YoY in FY24 amid weak domestic demand, recovered by an estimated five per cent in Q1 FY25. The recovery trend may continue in FY25. ICRA expects the operating profit margins to expand by 100-150 bps, due to scale benefits and cost-saving measures undertaken by industry players,'' Srikumar.

The industry had incurred high debt-funded capex in FY23, partly due to the deferment of major capital expenses during COVID-19 (FY20-21). Hence, the industry’s coverage metrics deteriorated in FY23, with a drop in yarn demand in H2 FY23. 

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The spinners have halted major capex plans in the near term due to weak domestic demand and lower realisations in FY24. ICRA, however, expects a marginal pick-up in capex announcements in FY25, driven by modernisation requirements, the flow of demand from China, and an improvement in domestic demand from downstream apparel companies.

“The industry leverage levels rose in FY24, primarily due to the increase in short-term borrowings available to fund the incremental working capital requirements. The leverage levels are expected to reduce with better cash accruals and expectation of minimal capex spending,'' added Srikumar.

Consequently, according to ICRA, the cotton industry’s debt protection metrics shall witness some improvement – the total outside liabilities to tangible net worth ratio is expected to improve marginally to ~0.6 times in FY25 (0.7 times in FY24), while the total debt to operating profit ratio shall improve to ~2.5-3.0 times from 3.5-4.0 times in FY24.