Healthy demand from end user industries, and increased blending with cotton yarn due to decadal high prices of cotton, will drive revenue growth of 18-20 percent this fiscal for polyester yarn manufacturing sector, according to capital market company CRISIL.
Operating profitability of polyester yarn segment is also expected to increase by 100 basis points to about 11 per cent this fiscal, driven by continued high-capacity utilisation (over 90 percent) due to demand growth and healthy polyester yarn spread (difference between prices of polyester yarn and its raw materials). Better profitability and expected modest capital spending will improve credit profiles of polyester yarn manufacturers, shows an analysis of 24 players that account for about 40 percent of the sector’s revenues.
Polyester yarn is used mostly in athletic and leisure wear, home textiles and garments. Recovery in demand from these end-user segments and multiple price hikes had led to a revenue growth of 60 per cent last fiscal, though on a low base, with sales volume picking up 15 per cent. Demand is seen to remain healthy this fiscal too, with garments and home textiles segments expected to grow at 16-18 per cent and 12-13 per cent in fiscal 2023 respectively, driven by recovery in domestic demand and moderate growth in exports, CRISIL said.
The continued wide price differential between cotton yarn and polyester yarn will result in higher blending among downstream players, further spurring demand for polyester yarn.
Gautam Shahi, Director, CRISIL Ratings, said “Polyester yarn is cost effective to blend with cotton yarn, and since cotton yarn prices have risen by 25 percent over the past year, higher blending has increased the demand for polyester yarn. With increased differential between cotton and polyester yarn prices to sustain, we expect 4-5 per cent of cotton yarn demand to shift to polyester yarn. This shift is expected to continue for most part of this fiscal as end user segments operate in a price competitive environment.”
Purified terephthalic acid (PTA) and mono-ethylene glycol (MEG), both crude derivatives, account for 80 per cent of raw material cost for polyester yarn manufacturers. Their prices have increased sharply due to supply chain issues arising from the Russia-Ukraine conflict.
However, buoyant demand and timely pass-through have supported the polyester yarn spreads vis-à-vis its key raw materials. The average spreads rose to a five-year high of Rs. 29 per kg last fiscal from Rs. 22 per kg in the previous fiscal and should sustain at Rs. 28-29 per kg this fiscal.
Polyester yarn sector will also benefit from favourable demand-supply dynamics as no large capacity addition is expected in the industry over next two fiscals, while demand is expected to grow at 7-8 per cent for the same period.
Sushant Sarode, Associate Director, CRISIL Ratings, said “With capital spending expected to remain moderate, better cash generation and gradual debt repayment will drive improvement in the credit profiles of polyester yarn manufacturers over the next few fiscals. Ratios of interest coverage and gearing2 are expected to improve to 11 times and 0.5 time, respectively, this fiscal from 7.6 times and 0.6 time, respectively, in the last.”
Volatility in crude oil prices as well as any resurgence in COVID-19 cases impacting the demand-supply situation will remain the key monitorables over the near term.