‘US ban on Xinjiang cotton cranks-up India’s yarn exports’

New Delhi: The US move to ban use of China’s Xinjiang cotton has cranked up India’s yarn exports, ratings agency Crisil said.

Besides, the agency expects operating profits of cotton spinners will double next fiscal as revenue spurts 20-25 per cent on higher sales to Asian buyers and appreciation in cotton yarn prices.

Consequently, the credit outlook for cotton spinners, which was negative in the first half of this fiscal, will turn positive next fiscal, as accruals improve and inventory reduces, Crisil said in a study.

According to the agency, with global demand for knitted garments and home textiles recovering faster than expected due to extended stay-at-home period, and sharper focus on health and hygiene, exports of yarn to China, Bangladesh and Vietnam rose 22 per cent, 39 per cent and 51 per cent, respectively, on-year in April-December 2020.

What has also helped is the US move to ban use of Xinjiang cotton, which has cranked up Indian yarn exports, the study said.

Supplementing exports, the agency said is the expectation of revival in domestic demand next fiscal owing to recovery in discretionary spending by consumers.

Resultantly, the overall revenues of cotton spinners, which is set to decline 14-16 per cent this fiscal, should rebound next fiscal.

Spreads, too, have improved, the study said, pointing out that as a rebound in global demand lifted prices of yarn higher than cotton.

Earlier, spreads had narrowed to Rs 80-85 per kg in June-August from as wide as Rs 103 in May, and clawed back to Rs 90-95 in September-December.

This trend should continue in the next fiscal year, given improving demand, the study said.

Capacity utilisation of spinners has also risen from 70-80 per cent in the second quarter this fiscal to 90 per cent in the third, and is likely to remain high next fiscal, too, which supports revenue, said Gautam Shahi, Director, Crisil Ratings.

That, and widening cotton and yarn spreads would mean operating margins of spinners would increase 200-250 bps on-year to 11 per cent next fiscal, and operating profits would almost double.

As per the study, with demand rising, inventory should decline to typical levels of 2-3 months by the end of this fiscal, from around 4 months a year ago.

That would reduce dependence on short-term borrowings, it said.

The credit outlook for cotton spinners is positive as improving cash accrual and lower working capital debt will burnish debt protection metrics next fiscal, said Kiran Kavala, Associate Director, Crisil Ratings.

We expect the credit ratio to improve next fiscal driven by improvement in debt protection metrics such as interest coverage and net cash accrual to total debt of cotton spinners estimated to double to over 4 times and 0.25 time, respectively, next fiscal from an estimated 2 times and 0.12 time, respectively, this fiscal.

In addition, the study cited that higher exports and yarn realisation have helped spinners recover a chunk of the losses incurred in the first quarter of this fiscal.

“That said, China’s stance on cotton yarn imports and the sustenance of higher spreads remain the monitorables,” the study said.

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