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MMF prices to remain volatile in FY22: Ind-Ra

Mar 16, 2021
MMF prices to remain volatile in FY22: Ind-Ra

India Ratings and Research (Ind-Ra) has revised the textile sector outlook to improving for FY22 from negative, reflecting the likelihood of higher revenues and operating margins, post business disruptions led by COVID-19 in FY21. The agency expects the export and domestic demand to improve, leading to a strong improvement in sales volumes over FY22. The agency expects cotton fibre prices to stay steady while man-made fibre (MMF) price would remain volatile in FY22. Ind-Ra however expects improving realisations to lead to robust operating profitability and higher operating cash flows in FY22.

Ind-Ra has revised the rating Outlook to Stable for FY22 from negative, owing to improving credit metrics and healthy financial flexibility. Strong operational cash flow should enable credit metrics to improve, despite an increase in working capital requirements and capital expenditure outflows. The benefits of integrated business operations, healthy balance sheet liquidity, operating efficiencies and increasing diversification over FY22 have already been factored into the ratings. Sector players in the rating categories of A and above are likely to reflect resilience to moderate raw material price volatility and may have adequate-to-superior liquidity profiles. The agency has maintained a negative outlook on small and mid-sized commodity pure-plays for FY22, in view of sector consolidation and intensifying competition, both led by continued stress on liquidity and subdued capacity utilisation.

The industry has witnessed a shift towards home-hygiene economics during and post pandemic, resulting in sharper recoveries for the home textile segment. While the spinning and apparels segment witnessed pre-COVID recoveries during 2QFY21, MMF and fabrics recovered during 3QFY21, led by a delayed improvement in domestic demand and festive sales. Liquidity remains chocked for small players in the unorganised arena with lack of bank funding and delayed recoveries. Consumer demand with over 30 months of slow growth might improve in FY22 with a positive outlook on household spending and rural discretionary spending. While players in spinning are likely to shy away from capex until FY23 led by lower capacity utilisations. However, apparel and made-ups are expected to continue investing in building capacities during FY22 with China Plus One sourcing metamorphosis playing out.

Textile exporters in the cotton and yarn segments continued to recover in 2Q-3QFY21, with cotton yarn volumes higher by 8 per cent yoy during 9MFY21. While cotton fabrics reported uneven growth on a monthly and yearly basis, apparel exports increased over September-November 2020, before declining in December 2020 by 15 per cent yoy on account of a second COVID-19 wave in consuming economies. Apparel exports and MMF exports for 9MFY21 were lower by 28 and 30 per cent respectively yoy in 9MFY21. The agency expects the export demand to improve moderately in 4QFY21, on back of the accelerated vaccination and China Plus One sourcing strategy, and to continue the trajectory over FY22. Furthermore, the ongoing impact of sourcing restriction of China (Xinjiang) cotton could play an important role in it.

Market share consolidation post COVID is likely to continue in FY22, at the cost of mid and small commodity players. Spinning, fabrics and MMF sector consolidation will continue in the medium term, benefiting large scale issuers. Ind-Ra expects the textile sector’s leverage in FY22 to improve from FY21 levels and sustain around FY20’s, supported by healthy EBITDA generation and a recovery in demand-consumption levels.