With pressures building up on credit profiles of domestic cotton spinners, as they continue to grapple with challenges on the demand front, ratings agency ICRA has maintained a ‘Negative’ outlook on the sector.
Further the agency’s note says that the performance of domestic cotton spinners is likely to weaken considerably in FY2020, with operating margins for the year being estimated to correct by ~300-400 bps vis-a-vis previous year. As a result, operating profitability is expected at multi-year lows, closer to the level last witnessed in FY2012, when most players suffered sizeable losses on inventory due to steep unexpected correction in cotton prices.
As for the outlook, even though the cotton crop outlook for the domestic cotton year ending September 2020 remains favourable, competitiveness of the Indian spinners could be hurt if there is a significant market intervention by The Cotton Corporation of India Limited (CCI) which triggers a relative increase in domestic fibre prices vis-a-vis international prices. This is more so as the cotton prices are likely to remain soft globally amid a healthy crop outlook for CY 2020, the report said.
India’s cotton yarn export quantity fell by ~35% year-on-year during H1 FY2020, as a result of the aforesaid factors. Whereas markets other than China, which has been the largest cotton yarn market for India in the past few years, had supported demand during FY2017 and FY2018 when exports to China fell, pressure is more broad-based now. In comparison to a ~57% year-on-year decline in cotton yarn exports to China during 5M FY2020, exports to the other major markets have declined by over 20% year-on-year, led by a ~42% and ~27% year-on-year decline in exports to Bangladesh and Pakistan respectively. Overall, based on the current trends, ICRA expects India’s cotton yarn exports to decline to an eight-year low level during FY2020.