Indian cotton yarn trading nearly 40% above the year-ago level; though transitory, higher spread to help spinners partially offset Covid impact: ICRA

• The surge in sales by domestic downstream companies in Q3 FY2021, led by pent-up demand and festive buying, are estimated to have led to reduced channel inventories
• ICRA channel checks suggest that the cotton spinners are booked with orders till March 2021

Indian cotton yarn prices have surged significantly in the recent weeks, with the 30s carded knitting yarn from Ludhiana trading ~40% higher Y-o-Y in the week ended January 22, 2021. The recent surge in domestic cotton yarn prices has been driven by improving demand from the domestic downstream segments as well as continued healthy export demand.

Elaborating on this, Mr. Jayanta Roy, Senior Vice President & Group Head, Corporate Sector Ratings, ICRA, said, “Surge in sales by domestic downstream companies in Q3 FY2021, led by pent-up demand and festive buying, are estimated to have led to reduced channel inventories, which is resulting in increased activity through the value chain. Together with closure/ scale-down of some spinning capacities owing to distressed financial position, this has resulted in a relatively lower increase in cotton yarn production vis-à-vis demand, creating a shortage situation and hence triggering a surge in cotton yarn prices.”

The cotton spinners are estimated to have reached optimum capacity utilization levels in the recent months,  with overall cotton yarn production increasing by 3% Y-o-Y in the three-month period ended November 2020, despite closure/ scale-down of some capacities. This has brought down the decline in overall cotton yarn production in the country to ~30% Y-o-Y in 8M FY2021, vis-à-vis a steep 50% Y-o-Y decline witnessed in the first five months of the current fiscal. ICRA’s channel checks suggest that the cotton spinners are fully booked with orders till March 2021 and are getting good queries for the subsequent months as well.

Post the pandemic impact in Q1 FY2021, recovery in India’s cotton yarn segment in the current fiscal had been led by exports (which typically account for ~25-30% of India’s total cotton yarn production), while the recovery in the domestic market came with a lag. India’s cotton yarn exports registered a Y-o-Y growth of ~8% in 8M FY2021, albeit on a low base, as cotton yarn exports had witnessed a Y-o-Y decline of ~30% in 8M FY2020 amid uncompetitive domestic cotton prices last year.

Besides the restrictions placed by the US on the use of Chinese cotton, competitive domestic cotton and cotton yarn prices are believed to have supported export demand for India’s cotton yarn. Notwithstanding the increase in yarn realizations across markets with recovery in demand, the prices for Indian cotton and yarn remained lower than the international prices for much of the year. While the recent surge in domestic cotton yarn prices has narrowed the spread between domestic and international cotton yarn prices, Indian cotton yarn remains competitive.

Although cotton, as well as yarn prices, started firming up from September 2020 onwards, an increase in yarn prices has been higher than that in cotton prices. This in turn has supported an improvement in contribution margins, which averaged at ~Rs. 112/kg in Q3 FY2021, ~26% higher than ~Rs. 90/kg in Q2 FY2020.

Commenting on this, Ms. Nidhi Marwaha, Vice President & Co-Head, Corporate Sector Ratings, ICRA, said: “In the recent months, the contribution margins have surpassed the pre-pandemic levels, briefly touching multi-year highs as well in the recent weeks. While the spreads are likely to normalize by Q1 FY2022, these are expected to remain healthy in Q4 FY2021, with spinners having booked orders as well as cotton stocks for the next two months.”

As a result, the overall business performance of spinners is expected to revert to the pre-pandemic levels in H2 FY2021. Nevertheless, the full-year performance is expected to moderate in terms of revenues as well as profitability, due to the loss of business in Q1 FY2021. Overall, ICRA expects the sample of seven large, listed spinning companies to log a ~15-20% Y-o-Y decline in revenues and up to 200-300 bps contraction in operating margins in FY2021 owing to the pandemic. Thereafter, the spinning companies are likely to sustain the growth trajectory in FY2022. With a low base effect, this is expected to translate into a growth of ~20% in turnover and an improvement in operating margins to the extent of 200-300 bps. Capitalization and coverage metrics are estimated to weaken to multi-year lows in FY2021 (Debt/ OPBDITA and Interest cover of ~4 times in FY2021 vis-à-vis 3.1 and 5.4 times in FY2020 respectively), before reaching pre-Covid levels in FY2022.

source https://nrinews24x7.com/indian-cotton-yarn-trading-nearly-40-above-the-year-ago-level-though-transitory-higher-spread-to-help-spinners-partially-offset-covid-impact-icra/?utm_source=rss&utm_medium=rss&utm_campaign=indian-cotton-yarn-trading-nearly-40-above-the-year-ago-level-though-transitory-higher-spread-to-help-spinners-partially-offset-covid-impact-icra

January 28, 2021