Indian spun yarn industry is the world’s second-largest spinning industry, having an installed capacity of nearly 50 million spindles as on Mar. 31, 2015, and currently producing over 6,600 million kg of spun yarn annually of which nearly 4,000 million kg is cotton yarn (approximately 61% of the total yarn production). Over the past 4 years ended FY15 (refers to the period April 1 to March 31), the Indian cotton yarn production has risen steadily except in the year FY12 (due to lower availability of raw cotton).The growth in production was largely due to improvement in capacity utilisation of the existing spinning units along with addition of new capacities aided by high growth in exports sales where the exports volumes have grown by 11%, 42% and 20% in FY12, FY13 and FY14, respectively. India exports around 30-35% of its total cotton yarn production.The growing export volumes of yarn and improving average sales realisation aided by rupee depreciation have led to improvement in credit profile of many domestic cotton spinning units in recent past. However, the industry dynamics changed in FY15 on the back of fall in export demand from China.
India is also amongst the largest exporter of garments in the world and with rise in export of garments, the consumption of fabric and yarn is also expected to increase. The export of readymade garment witnessed a healthy double digit growth of around 13% during April 2014-February 2015 which was primarily attributed to healthy demand from the United States (US) and the European Union (EU) which accounts for bulk of the apparel exports from the country. Economic activities in the US and the EU have witnessed sign of improvement and as a result, CARE expects growth in demand for apparels from both the regions to continue.
In the domestic market too, factors such as urbanisation, expected rise in per capita income, favourable demographics and a shift in preference for branded products would continue to boost the demand for apparels and fabrics. Besides, a decline in cotton yarn prices is likely to improve its competitiveness vis-àvis synthetic yarn.
Going forward, CARE expects the recovery in demand for cotton yarn to be driven by steady growth in domestic consumption along with export growth from China. Apart from this, Bangladesh and Vietnam continue to augment their yarn purchases from India to service their growing apparel export industry. The continued government thrust on the sector would also facilitate the growth in the domestic market. Further, lower cotton prices is expected to benefit the cotton spinning mills albeit the improvement in profitability margin would be restricted as they need to pass on the benefit of lower cotton prices to their customers. Furthermore, with the lower cotton prices, mills' working capital requirement is expected to decline which will result in saving in interest cost. However, in the medium term, Chinese demand and volatile foreign currency may play a crucial role and it would remain a key monitorable.
CARE also envisages that the cotton spinning units that have moderate to low leverage and sound management of working capital and foreign exchange would be better placed in credit metrics given the volatile and cyclical nature of the sector.
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