High cotton prices augur well for switching to man-made fibre

High cotton prices augur well for switching to man-made fibre

Mahaveer Shankarlal explains the current state of the textile industry and its impact on sub-sectors to Divya Shetty.

India Ratings and Research (Ind-Ra) has revised its outlook on the textile sector to deteriorating for 2HFY23 from neutral. CY23 outlook will more likely to be deteriorating as well due to weak exports demand. Indian textiles are dependent on export market to the extent of 25-30 per cent of the overall sales.

Indian textiles have continued to benefit in the past two years on account of a sharp uptick in exports, driven by anti-China sentiment, strong demand key export destinations including the US and Europe. However, in the next few quarters, the build-up of inventories on account of the cut back on discretionary product expenditure and the reallocation of expenses to services will continue to impact exports sales.

India Ratings and Research expects the long drawn request of addressing the inverted duty structure in man-made sector.

Further, Minimum Support Price for cotton could be relooked given the cotton prices have been traded at a premium to international prices leading market share loss for cotton downstream since beginning of FY23.

Different sub-sector may have different outlook. The home textile segment continues to experience a demand slowdown amid high channel inventory. India was also disadvantaged in the global trade due to high cotton costs.  In CY23, India stands to re-gain export market share due to likely to low cotton output in the USA and China strict COVID policies. 

Cotton spinning may continue to benefit from the China+1 sourcing and continuing US ban on the use of cotton from Xinjiang, China amid likely normal cotton output in current harvest season. Man-made textiles are likely to continue to gradual improvement with value-addition and better capacity to absorb volatility in RM input prices. High cotton prices augur well for switching to man-made fibre.

India Ratings’ Rating Outlook is stable reflecting the cushion available in the existing ratings to absorb the deterioration in the industry outlook over the course of the next few months. Overall, with weak demand outlook decline in Input prices could cushion the margins which is likely to be impacted due to lower capacity utilisation. Ind-Ra expects the credit metrics to moderate in CY23, given the impact on EBITDA margins and the ongoing capex plans.

About the author: Mahaveer Jain is a Director at India Ratings & Research (Fitch Group) and co-heads Textile vertical (credit ratings). Jain has over 15 years of experience in financial research.

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