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The rating agency ICRA in its latest report has said that the despite lower revenues, operating margins of Indian cotton spinning companies is likely 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.

The report said 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. 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. It 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 Outside Liabilities/ Tangible Networth ratio, is also expected to improve marginally to 0.5 times in FY2024 (0.6 times in FY2023).

According to the report, domestic cotton prices were at a historical high in H1 CY2022, but had declined steadily in H2 CY2022. For 5M CY2023, cotton prices declined further by 20% compared with December 2022, as the new season crop hit the market. As per the estimates of the office of the textile commissioner, domestic cotton production for CY2023 is projected to increase by 10% on the back of expected higher acreage in Maharashtra and Gujarat. ICRA however notes on the slow progress on the cotton sowing areas in Maharashtra and southern states due to the delayed onset of monsoon. However, as the sowing season extends till July in these regions, ICRA expects a pickup with the normalization of monsoon. The deficit (on a y-o-y basis) in sowing has already improved from 14% as at the end of June to 11% as on 7th July.