India's cotton yarn industry is projected to witness a robust 12-14% growth in FY24, fueled by a remarkable 85-90% jump in exports. This increase is attributed to a shift in sourcing preference from China and rising demand for spring/summer textiles in the US and EU. However, a significant drop in cotton prices is likely to cause a 9-10% decline in revenues, impacting domestic demand.
In the first seven months of FY24, yarn exports soared by 142% compared to the previous year, driven by increased shipments to China. This has pushed the share of exports in overall production from 19% to 33%. Bangladesh, China, and Vietnam remain the biggest buyers, accounting for 60% of Indian yarn exports.
While the ongoing Red Sea conflict poses no immediate threat, its prolonged escalation could impact apparel exports and subsequently harm domestic and export demand for cotton yarn.
Domestic cotton prices, after hitting record highs in H1 FY23, have steadily declined due to a weak market. Production is also expected to dip by 6% in 2024 due to reduced acreage and uneven rainfall. These factors suggest a marginal increase in cotton prices from current levels.
Yarn prices have mirrored the downward trend in cotton prices, further impacted by weak demand from downstream apparel companies. ICRA predicts continued softness in yarn prices for the rest of FY24, with a slight uptick in FY25 driven by potential recovery in downstream demand.
Despite the volume increase, spinners will see a 9-10% decline in operating income and a 200-240 basis point drop in operating margins due to lower realisations and reduced gross contribution. However, investments in in-house power generation by some players may offer some relief in the medium term.
The industry witnessed a rise in debt-funded capex in FY22 and FY23, partly due to pandemic-related deferments. Now, with weak demand and lower realisations, spinners are holding off on major expansions. However, ICRA expects a pick-up in capex announcements by FY25, driven by modernization needs, the "China Plus One" strategy, and potential improvement in domestic apparel demand.
This news paints a picture of a vibrant export market for Indian cotton yarn, counterbalanced by domestic challenges due to falling prices and subdued demand. The industry's future hinges on navigating these contrasting trends and adapting to shifting global dynamics.
