New Delhi, Aug 26 (SocialNews.XYZ) Revenues of cotton spinners are set to decline 30-35 per cent in the current fiscal -- a six year low, because of tepid domestic and export demand following the Covid-19 pandemic, rating firm CRISIL said on Wednesday.
This along with inventory losses and lower profitability is expected to result in moderation in credit quality of cotton spinners this fiscal, a study of 150 CRISIL-rated firms showed.
Domestic demand for cotton yarn, which accounts for over 70 per cent of overall demand, has been impacted because of the slack in end-user segments such as readymade garments and home textiles.
Cotton yarn exports, too, have been materially affected because of fewer orders from China and Bangladesh, which account for over half of India's exports.
Revenue from exports had already wound back by a third last fiscal, with China increasing procurement from other countries, predominantly Vietnam.
According to the rating agency, the decline in yarn offtake since Covid-19 afflictions began in February 2020 has meant the current fiscal began with higher inventories of 4-4.5 months compared with 3-3.5 months on average in the past two fiscals. With demand likely to revive only from the second half of this fiscal, inventories will remain high in the first half, the report said.
Hetal Gandhi, Director, CRISIL Research, said: "Cotton spinners are facing a double whammy of sharp erosion in revenue and inventory losses. Revenues of the domestic industry, which had fallen last fiscal, are set to slip again and touch a six-year low. Additionally, inventory losses loom because cotton prices have declined 10-15% on a sequential basis in the first quarter of the current fiscal."
With yarn prices falling more than cotton prices, cotton-yarn spread is seen narrowing down to Rs 75-80 per kg this fiscal versus Rs 80-85 per kg last fiscal, which will contract operating margins by 350-400 bps.
Further, the working capital cycle has got elongated because of a stretch in receivables following steep business pressure on key end-users such as RMG makers. Consequently, spinners have been depending more on bank borrowings, leading to high utilisation of working capital limits.
CRISIL expects credit outlook for cotton spinners to remain negative this fiscal.
Krishna Ambadasu, Associate Director, CRISIL Ratings, said: "Already, the credit ratio for CRISIL rated cotton spinners has deteriorated between April-July 2020. Tepid business performance and consequent, low cash flows from operations are aggravating liquidity pressures in the first half of the current fiscal. Interest coverage ratio for CRISIL rated players is expected to slide to below 1.6 times this fiscal versus 2.7 times last fiscal."
Most firms are managing the situation by availing of moratorium on debt servicing, additional Covid-19 related bank lines, and government measures such as the relief package to micro, small and medium enterprises.
Additionally, one-time restructuring of loans announced by RBI will be a viable option amid tightness in accruals to repayments in current fiscal.
That said, the benefit of continuing soft cotton prices and liquidation of high-cost inventories from the past fiscal should help cotton spinners perform better in the second half of the current fiscal, provided demand limps, the CRISIL report said.
Source: IANS
Gopi Adusumilli is a Programmer. He is the editor of SocialNews.XYZ and President of AGK Fire Inc.
He enjoys designing websites, developing mobile applications and publishing news articles on current events from various authenticated news sources.
When it comes to writing he likes to write about current world politics and Indian Movies. His future plans include developing SocialNews.XYZ into a News website that has no bias or judgment towards any.
He can be reached at gopi@socialnews.xyz
This website uses cookies.
