Operating margins for the cotton spinning industry to improve 11.5-12.0% in FY 2024

economictimes.indiatimes.com:

ICRA has recently published a research note on the domestic cotton spinning industry. The rating agency expects demand for the industry to improve by close to 10% in volume terms in FY2024 on a yearly basis, primarily gaining through a shift in preference away from Chinese cotton, and the expectations of demand improving for the spring-summer season in USA and EU regions.

However, an expected moderation in cotton prices will lead to lower realisations, which is likely to translate to a 7% year-on-year (YoY) decline in revenues to Rs. 34,000 crore in FY2024.

Commenting on this, Kaushik Das, Vice President & Co-Group Head, Corporate Sector Ratings, ICRA, said in a statement, “Despite lower revenues, ICRA expects the operating margins of Indian cotton spinning companies to improve by ~50 — 100 bps to 11.5%-12% in FY2024. The spinners are expected to benefit from the operating efficiencies arising from higher volumes, and lower logistics expenses as the blockages at the ports in various regions have started to ease, accompanied by a reduction in container freight rates.

Nonetheless, profits and cash accruals of spinners are expected to be marginally lower in FY2024 compared to FY2023.” While the cash accruals of players are expected to decline marginally, ICRA expects the spinners’ borrowings to come down too, in FY2024. Lack of any major capital expenditure plan along with lower working capital requirements, because of the softening in cotton prices, are likely to lower the debt levels and improve the capital structure for companies.

ICRA expects the debt coverage ratios for the sector to improve in FY2024 with debt/OPBITDA forecast to ease to ~2.2X from 2.4X in FY2023. The capital structure, as reflected by the ratio Total