Exports have gained momentum in FY22

Exports have gained momentum in FY22

The US ban on cotton from Xinjiang has led China to import more cotton from other countries such as Vietnam and India. As a result, India's exports to China increased significantly in Q4 FY21 and share of China in Indian exports increased to 25% in FY21 (from 22% in FY20). In FY22, the momentum in export growth is estimated to be higher due to revival in global economy along with ongoing restrictions on Xinjiang region produced cotton and possible similar restrictions from other countries such as UK, says Anuj Sethi, Senior Director, CRISIL Ratings, in this interview.

The US ban on cotton from Xinjiang has led China to import more cotton from other countries such as Vietnam and India. As a result, India’s exports to China increased significantly in Q4 FY21 and share of China in Indian exports increased to 25% in FY21 (from 22% in FY20). In FY22, the momentum in export growth is estimated to be higher due to revival in global economy along with ongoing restrictions on Xinjiang region produced cotton and possible similar restrictions from other countries such as UK, says Anuj Sethi, Senior Director, CRISIL Ratings, in this interview.

Is the demand for yarns (synthetic as well as natural) growing steadily in FY22? How was the performance of the yarn market in FY21?

The cotton yarn industry declined by 15-17% in FY21 to 3200 million kg (volumes), mainly due to a steep decline in demand in the first half (H1) of FY21 due to lockdown restrictions across the country. However higher demand from end industries such as readymade garments (RMG) and home textiles and gradual opening of international markets led to recovery during the second half (H2) of FY21. The cotton yarn industry size is estimated to grow by 5-7% in volumes terms in FY22, post a decline in FY21, driven by recovery in domestic demand, continuing strong demand from US and improving demand from European markets. In value terms, growth will be healthy at over 15% due to higher realisations.

Overall man-made fiber (MMF) and yarn volume declined sharply by about 20% to approximately 4,850 ktpa in FY21 due to fall in buying activity amidst the pandemic. For polyester yarn and viscose yarn, the overall demand (volume) declined by 21-23% in FY21 led by decline in demand from downstream apparel and technical textile segments. In FY22, demand (volume) is expected to increase by about 25% to 6030 ktpa, supported by both domestic demand (82% overall) and export demand.

Is rising raw material cost a cause for concern?

Raw materials constitute 50-65% of the total income for majority of cotton spinners. So any changes in raw material prices without any subsequent rise in cotton yarn prices might have a significant impact on profitability of cotton spinners.

Global and domestic cotton prices have been rising due to shortage of global supply. The increase in raw material prices along with strong domestic and international demand has led to healthy yarn-cotton spreads and higher realisation for cotton spinners. 

The domestic cotton prices started increasing post reaching Rs 100/kg in Q1 FY21, and further to Rs 110/kg in domestic market subsequently with improvement in demand in both domestic and export markets, and due to production loss due to farmer protest in northern India. Cotton prices are expected at 130-135/kg in FY22. 

Yarn prices are estimated to be about Rs 208-213/kg for FY21. In FY22, the prices are expected to increase due to increase in input (cotton) costs due to higher growth in downstream demand. 

The cotton-yarn spreads are expected to improve from to Rs 120-125 per kg in FY22 from Rs 100-102 in FY21 (refer to Figure 1). Owing to this, EBITDA margins are expected to improve by approximately 100-150 bps in FY22 as a result of increased realisation, better revenue growth and increase in utilisation levels. 

How is 10% import duty on cotton hurting the spinning mills (who have been advocating removal of the duty)? 

India’s cotton production is estimated to contract by about 1% to 6.1 billion kg in cotton season CS21, due to decline in sowing area. Meanwhile, domestic cotton consumption is expected to increase by at least 27-32% over low base of previous cotton season. This will create gap of 0.6-0.7 billion kg. Increase in import duty will add to the already high cotton prices impacting the overall raw material cost which is approximately 60% of the revenues. 

What is the contribution of exports to the Indian yarn industry? Are exports growing?

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