The operating margins of Indian cotton yarn spinners may shrink by 100-150 basis points (bps) in fiscal 2019-20 owing to lower cotton output, rising cotton prices and moderating demand, reversing the recovery seen the previous fiscal, according to rating agency CRISIL. That, however, is unlikely to materially affect the credit profiles of spinners, it said.
The unlikelihood results from the continuation of three major spurs of fiscal 2019-modest capital expenditure intensity, prudent working capital management, and strengthened balance sheets, CRISIL said in a press release.
India’s cotton production is expected drop by over 5% in cotton season 2019-from October 1, 2018, to September 30, 2019-because of low water availability and inadequate south-west monsoon in key cotton producing states and lower yields owing to increase in incidents of pest attacks.
Lower cotton production is expected to shrink India’s cotton stock to a two-year low of 1.2 months by the end of cotton season 2019, leading to firming up of domestic cotton prices to Rs 128-140 per kg this fiscal, marking a rise of 7-8% over 2018-19.
Global cotton prices, meanwhile, are expected to remain steady at Rs 128-134 per kg as lower production in India, the United States and Australia will be offset by higher production in China and Brazil. This would narrow the gap between domestic and global cotton prices, CRISIL said.
Demand for cotton yarn is also seen turning south due to moderation in domestic as well as exports demand. CRISIL estimates that overall cotton yarn demand (volume terms) will grow at a slower pace of 4.5% in 2019-20 compared with 5.6% in the last fiscal. The slowdown will be mainly driven by tepid growth in domestic demand at 2.9-3 per cent in this fiscal.
Growth in exports is also expected to be slower at 9-10 per cent in this fiscal, compared with 13.5% last fiscal, amid trade tensions between the United States and China and commissioning of yarn capacities in Vietnam, which enjoys preferential access to Chinese markets.