Based on a shift in sourcing preferences away from China and expectations of improving demand for the spring/summer season in the US and the EU, rating agency ICRA has projected a 12–14 per cent annual increase in demand for the domestic cotton spinning industry in FY 2024. Yarn exports are expected to rise by a sharp 85 per cent to 90 per cent. These will increase domestic demand from producers of textiles for clothing and homes.
However, a notable deceleration in cotton prices, leading to lower yarn realisations, is likely to result in a 9–10 per cent YoY decline in revenues, or about Rs 33,465 crore, in FY 2024.
Commenting on this, Jayanta Roy, Senior Vice-President and Group Head of Corporate Sector Ratings at ICRA, said, “Despite the increase in cotton yarn volumes, the ICRA expects the operating income of Indian cotton spinning companies to decline by 9-10 per cent and operating margins to shrink by 200-240 bps in FY 2024 amid a significant drop in realisation and lower gross contribution levels.”
About 25–35 per cent of India’s total cotton yarn production is exported; the domestic market makes up the remaining amount. The export of cotton yarn saw a sharp fall (53 per cent) in FY 2023, however the current fiscal year has seen a reversal of that trend. With higher exports to China and a low base, overall yarn export volumes climbed by 142 per cent (Y-o-Y) in the first seven months of FY 2024. As a result, the share of exports in total output jumped from 19 per cent in FY 2023 to 33 per cent in the same period of FY 2024.
ICRA projects that India’s yarn exports will rise by 85–90 per cent YoY for the entire fiscal year 2024. Vietnam, China, and Bangladesh make up 60 per cent of these exports. Given that Asia accounts for 70 per cent of India’s yarn exports, the ongoing Red Sea conflict is not expected to have an immediate impact on those exports. However, a prolonged standoff would likely have an adverse effect on the volume of apparel exported, which in turn would affect the demand for cotton yarn both domestically and internationally and its realisations.
In H1 FY 2023, domestic cotton prices reached an all-time high; however, in H2 FY 2023, they gradually decreased. A poor operating climate caused the prices to drop by 25 per cent for the 9M FY 2024 when compared to the average cotton prices in FY 2023. The Office of the Textile Commissioner projects that a decrease in cotton sown area combined with irregular rainfall will result in a 6 per cent decline in domestic cotton production for the year 2024. Reduced projected production means that cotton prices should rise slightly from where they are now.
The ICRA anticipates that the prices of cotton yarn will stay low for the remainder of FY 2024 and will only slightly rise in FY 2025 as demand from downstream businesses increases. Due to the sluggish domestic market, the average gross contribution margins for the spinners fell precipitously by 19 per cent in the 9M FY 2024 compared to the same period in FY 2023. The spinners’ gross contribution margins rose by 9 per cent in November 2023 after plunging to a multi-year low in August 2023. The ICRA projects that the gross contribution to cotton yarn will decrease in FY 2024 compared to FY 2023 levels, notwithstanding a slight improvement in gross contribution margins in Q4 FY 2024 due to new crop arrivals.
