Operating profits of cotton spinners to double next fiscal: CRISIL

Operating profits of cotton spinners are likely to double next fiscal as revenues will increase by 25 per cent due to higher sales to Asian buyers and appreciation in cotton yarn prices, a study of 102 of them, including 95 rated by CRISIL, shows. As per a CRISIL report, as global demand for knitted garments and home textiles recovered faster than expected, exports of yarn to China, Bangladesh and Vietnam rose by 22 per cent, 39 per cent and 51 per cent, respectively from April-December 2020.

Capacity utilization of cotton spinners has also risen to 90 per cent in the third quarter of this fiscal, says Gautam Shahi, Director, CRISIL Ratings. He expects this to remain high in next fiscal too. Along with widening cotton and yarn spreads, this would boost the operating margins of spinners by 200-250 bps on-year to ~11 per cent next fiscal, and double their operating profits.

The inventories of these spinners are also likely to decline in 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.

Kiran Kavala, Associate Director, CRISIL Ratings, expects the credit ratio to improve next fiscal driven by improvement in debt protection metrics such as interest coverage2 and net cash accrual.