Lower cotton prices and demand recovery are expected to support textile sector’s profitability. This is in view of expected margin expansion due to softening in cotton prices, improved consumer spending outlook in key user countries and the low base effect of FY18, according to India Ratings and Research.

The report noted the slowdown in domestic demand for textiles due to demonetisation and the goods and services tax (GST) implementation, seems to have bottomed out in the second half of the fiscal. Better margins, modest reduction in working capital requirements and subdued capex in FY19 will improve the overall credit profile.

The report noted that the textile sector outlook is constrained by the possible impact of pink bollworm on cotton output and prices, and increasing crude prices on synthetics. Increasing crude price is likely to narrow the spread between cotton and synthetic yarns, thereby moderating the pace of switch to synthetics from cotton textiles. Operating margins of synthetics manufacturers may witness volatile margins due to crude price fluctuations and delays in passing on cost inflation.

A higher-than-expected rise in cotton acreage at 19 per cent and a consequent 11 per cent increase in crop production in FY17-FY18 are likely to moderate cotton prices in FY19, despite increase in prices in the last few months due to the pink bollworm issue. The global stock-to-use ratio for cotton, excluding China, increased to 56 per cent in FY18 from 47 per cent in FY17, although Chinese inventory declined 17 per cent year on year.