Recovery in profitability amid curbs on cheaper imports and modest capex support credit profiles.
After two years of subdued performance, India’s polyester yarn manufacturers will see operating profitability recover by 100-150 basis points (bps) to 7-8 per cent this fiscal, because of countermeasures taken by the government to curb import of cheaper competing products.
A CRISIL Ratings analysis of 20 polyester yarn makers, comprising 40 per cent of the sector’s revenue, indicates as much.
To recall, in October 2023, the Indian government issued a Quality Control Order (QCO), mandating BIS certification on imported yarn, to address the influx of cheaper polyester yarn from China. Even though India imported 12 per cent of its total polyester yarn requirement in fiscal 2024 (an increase from 7-8 per cent prior to fiscal 2023), Indian polyester yarn manufacturers remained under pressure to match imported yarn prices to stay competitive.
Countering the QCO on polyester yarn, China took to exports of cheaper polyester fabric to India. To address the flooding of cheaper polyester fabric imports from China, the Indian government in March 2024, imposed a minimum import price (MIP) of $3.5 per kg on synthetic knitted fabric to restrict uncompetitive imports.
Says Gautam Shahi, Director, CRISIL Ratings, “The twin effect of the government measures will give domestic polyester yarn players a leg up. This is reflected in the fall in polyester yarn imports by 61 per cent in the seven months ending May 2024, after rising 92 per cent on-year in the seven months prior. The imports of synthetic knitted fabric, too, fell significantly in April-May on-year. Therefore, operating profitability of polyester yarn manufacturers will recover this fiscal and reach closer to the pre-pandemic level (see Chart 1 in Annexure), as steady downstream demand and import curbs will improve the spread between yarn and its raw material to Rs 24-25/kg in fiscal 2025 from Rs 23/kg the previous fiscal.â€
Bolstered by the declining volume of cheaper polyester yarn and fabric imports from China, revenue of domestic polyester yarn makers will grow 3-5 per cent this fiscal, after remaining flat last fiscal. This, along with recovery in operating margins, will result in cash accruals increasing by 20-25 per cent this fiscal, after a moderation over the last two fiscals.
Debt protection metrics, which were impacted in the last two fiscals due to lower margins and moderate revenue growth, are expected to recover this fiscal driven by improved cash accruals and moderate capital expenditure (capex).
Says Pranav Shandil, Associate Director, CRISIL Ratings, “Capacity utilisation in the industry remains moderate, at 65-70 per cent, following capacity addition of 5-6 per cent in the past two years. This obviates the need for any material capex spend this fiscal. With improving cash generation and modest capex requirement, credit profiles of polyester yarn manufacturers will recover.â€
Interest coverage is seen improving to 5.5-5.7 times this fiscal from 4.0-4.2 times last fiscal. Gearing should remain comfortable at 0.4-0.45 time (0.5 time as on March 31, 2024).
Any slowdown in demand from downstream segments, adverse movement in crude prices affecting raw material prices, or regulatory changes impacting the polyester yarn industry will bear watching in the road ahead.