Industry Risk Score : Textiles – Cotton Yarn

Executive Summary


India has the world's second largest spinning capacity, and produces over 3,400 million kg of cotton yarn. Cotton yarn accounts for the largest share, ~72%, of the total yarn production in India.

Exports contribute 25-30% of the total cotton yarn demand in India. While cotton yarn exports increased marginally by 2.2% in value terms in FY 2017-18, there was a decrease of 8.8% in volume terms. This was primarily due to high pricing pressure in the global markets, rationalisation of taxation system and growing competition from other emerging economies, which enjoy preferential duty access in key markets. The domestic market, which comprises two-thirds of the total cotton yarn produced in India, is seeing an upward shift. A major portion of yarn produced in India is consumed by fabric and apparel manufacturers. Demand for textile products has driven increased penetration of organised retail and consumerism, favourable demographics and rising income levels. Demand has, however, dampened to some extent due to relative price dynamics of manmade and blended fabrics. However, the Economic Survey 2017-18, recognising the tremendous potential in the sector, has projected growth on the back of available opportunities, robust raw material base, availability of skilled workforce and other competitive factor costs. Overall, the demand risk for cotton yarn industry is favourable.

The Indian cotton yarn spinning industry is highly fragmented, with organised and unorganised players. The industry is highly capital intensive and intensely competitive due to its commoditised nature. The organised segment also faces competitive pressure from unorganised players on account of the wider variety of products offered by the latter. On the exports front, the competition is primarily amongst organised players, mainly on account of product differentiation, quantity and capacity to address large orders in a specific time. Overall, the competition risk for cotton yarn industry is also favourable.

Input related risk for the industry is limited. The concerns mostly emanate from volatility in cotton prices, which comprises 50-55% of the operating costs of most organised players. Overall, the industry is favourably positioned as India is the world’s largest producer of cotton. While cotton production related risks are adequately diversified with multiple production geographies and large number of crop varieties, dependence on monsoon and poor inventory management infrastructure continue to be risk areas, leading to price volatility. The industry is also exposed to other risks factors such as rising power and fuel costs and lack of availability of cheap and skilled manpower.

The cotton yarn industry faces moderate risk of introduction of new laws, policies or regulations, or changes in the interpretation or application of existing laws and removal of subsidies. The industry is required to continuously invest in state-of-the-art machines to manage costs, improve quality and productivity. This is more so for organised players catering to export markets in order to retain competitiveness in the growing markets.

Overall, Acuité believes that the Indian cotton yarn industry will remain stable in the short-medium term. Increased exports, boost in domestic consumption and favourable government policies should help the industry register healthy growth over the medium term.

Key Risks & Attributes

  • Fluctuations in and regulation of raw material (cotton) supply and prices
  • Agro-climatic conditions
  • Domestic market sensitive to consumer spends, linked to economic cycles
  • Trade policy of importers
  • Foreign exchange risk
  • Risk of technology change and associated capital costs for upgradation


The Indian textile industry contributes to ~4% of the country’s gross domestic product, ~10% of manufacturing production and ~12% of the country’s export earnings, employing over 45 million people. The domestic textile industry is projected to reach USD 223 billion by 2021 from USD 150 billion in November 2017. India is also the world’s second largest textile exporter; exports stood at an estimated Rs. 274,400 crore in FY 2017-18, and witnessed a growth of 6.9% CAGR over FY06-FY18.

The cotton textile industry comprises raw cotton, cotton fibre, yarn (cotton, synthetic, blended), fabric and garments. In India, the presence of cotton in the textile chain is close to 70% vis-à-vis 30% from synthetics and man-made fibres, an inverse pattern compared with the global trends. This is due to the abundant and affordable supply of cotton as raw material, further supported by factors such as large area under cotton cultivation due to favourable conditions and the country’s climatic conditions agreeing with cotton clothing. India’s textile manufacturing set-up is uniquely positioned with production facilities across each level of the manufacturing value chain, from fibre to finished product. Cotton yarn comprises almost one-third of the cotton textile industry, next only to cotton made-ups (all fibres) with a share of ~50%; the balance ~20% being cotton fabrics.

Demand & Supply Scenario


Cotton yarn accounted for the largest share (72%) in total yarn production in FY 2017-18, which recorded a consistent growth of ~2.7% CAGR increasing from 4,712 million kg to 5,676 million kg during FY11-FY18.

With 50 million spindles and 0.84 million rotors, India has the world's second largest spinning capacity. Capacity built gradually over years has led to low cost of production per unit, giving India a strong competitive cost advantage relative to its global peers. The dual advantages of raw material availability and low labour costs strengthen the production cost base.

On the domestic front, increased penetration of organised retail and consumerism, favourable demographics and rising income levels are driving the demand for textiles. Further, growth in the real estate market results in demand for home textiles. The growth in private consumption is expected to create strong domestic demand for textiles in the near term. India is well placed to make the most of the available opportunities, as it has a robust raw material base, availability of skilled workforce and competitive factor costs.

In FY 2017-18, India exported cotton yarns worth Rs. 23,940 crore, comprising ~32% of the overall cotton textile exports. While cotton yarn exports increased marginally by 2.2% in value terms in FY 2017-18, there was a decrease of 8.8% in volume terms (~1,100 million kg of cotton yarn was exported). This was primarily due to high pricing pressure in the global markets, further caused due to rising costs of inputs, rationalisation of taxation system and growing competition from emerging economies including Bangladesh, Sri Lanka, Indonesia and Vietnam, which enjoy preferential duty access in key markets. Further, exports to China, which comprises a major share (~25%) of cotton yarn exports from India, declined by 18.3% in value over FY 2016-17. While the 3.5% duty attracted by Indian cotton yarn continues to act as a headwind for the industry, China’s increasing shift towards Vietnamese / Indonesian cotton yarn has further created a downward pressure on Indian products.

Owing to a fall in derived export demand from end-use products, cotton yarn prices witnessed a decline in FY 2017-18. Derived demand has been under pressure, but is expected to recover as the demand for readymade garments and home textiles from the United States and European Union is expected to recover in the near term. With the expiry of Multi-Fibre Agreement (MFA) in January 2005, cotton prices in India are fully integrated with international rates. However, cotton yarn prices have been highly volatile due to variations in the demand for substitute product, i.e., man-made fibres.

Despite the above factors, cotton yarn exports to Bangladesh, Pakistan and Vietnam are expected to improve in the near term, which may partially offset the fall in exports to China. Further, favourable trade policies and superior quality of cotton yarn vis-a-vis other countries, are expected to drive textile exports. Free trade with ASEAN countries and proposed agreement with the European Union should further boost exports.

Acuité finds demand risk for cotton yarn to be low. This is mainly due to favourable growth trends in retail and real estate based consumption in the domestic market. Export markets are expected to provide a favourable environment with India’s continued cost competitiveness advantage with a large raw material production base of cotton. Volatility of global cotton prices and competition from other emerging economies are key monitorables.

Nature & Extent of Competition


The Indian cotton yarn spinning industry is highly fragmented. Players in the industry can be categorised as integrated players and commodity players. Integrated players have a presence in whole or substantial part of the value chain, while commodity players focus more on bulk production and are engaged in spinning and/or weaving operations and supply of yarn or grey fabric. Here, the focus is mainly on the commodity players, largely operating in the organised market. The top five players as per market share in the cotton yarn industry are Trident Limited, Vardhman Textiles Limited, Nahar Spinning Mills Limited, SEL Manufacturing Co. Limited and Sintex Industries Limited with a market share of ~20%.

The cotton yarn spinning industry is highly capital intensive and is intensely competitive due to the commoditised nature of the product. There are varied type and scale of manufacturers, differentiated based on manufacturing capacity and quality of products. India has ~23 lakh powerlooms and ~24 lakh handlooms. Currently, spinning is the most consolidated and technically efficient segment of India’s textile industry.

Due to high capital investment, entry barriers in the organised space are lower. However, there is competition in the domestic market on account of product variety of the unorganised players, limiting the pricing power and constrains the profit margins of organised players.

On the exports front, competition is primarily amongst organised players on account of product differentiation, quantity and capacity to address large orders in a specific time. Further, exporters have to deal with differential import duties for their products in leading markets. Government policies and export benefits under the Foreign Trade Policy, duty drawback and free trade agreements, continue to play a crucial role in promoting the export of cotton textiles from India, and their profitability.

Acuité believes that though the overall industry is highly fragmented, the competition risk in the organised segment is lower due to entry barriers such as capital investment and production capacities. However,competition from players in the export markets continues to be high due to manufacturers in the emerging markets. Overall, the competitive landscape in the cotton yarn industry will continue to be moderate with supportive government tax incentives and trade policies.

Input Related Risk


Input related risk for the cotton yarn industry mostly emanates from the availability of and pricing of cotton. Overall, the industry is favourably positioned as India is the world’s largest producer of cotton with a share of ~27% in FY 2016-17. Production of raw cotton in India grew at a CAGR of 2.3% during FY07-FY17, providing adequate raw material for the yarn spinning industry.

Cotton yarn production fell by 1.8% to 40.6 million tonnes in FY 2016-17 and remained flat in FY 2017-18 due to lower availability of cotton and increased cotton prices. Production is expected to recover in FY 2018-19 in spite of the pink bollworm infestation in select geographies such as Maharashtra and Telangana. Cotton prices moved from Rs. 91 per kg in April 2016 to Rs. 108 per kg in March 2018 and further to Rs. 121 per kg in September 2018. Prices are slated to further rise by 2-3% in FY 2018-19. This rise however, is unlikely to have any material impact on yarn manufacturers.

Further, several factors including availability of raw cotton, end user market, and transportation play a key role in the localisation of cotton textile industry. Gujarat, Maharashtra, Telangana, Andhra Pradesh and Karnataka are the top five cotton producers in India. Owing to regional concentration of the industry, any adverse change in the local and regional economy and monsoon pose a risk to their business prospects.

Also, cotton is a seasonal crop and is harvested from October to February every year. Inventory management thus plays an important role and can ensure availability of good quality raw materials at reasonable prices. India produces most varieties of cotton. However, certain extra-long staple varieties are not produced in India and players using imported varieties of cotton are affected by international price trends, government regulations and domestic and foreign trade policies. This limits the bargaining power of yarn manufacturers and price flexibility over raw material suppliers. Efficient cotton procurement strategies such as contract farming, proficiency in estimating the future trends in the cotton market, proximity to cotton cultivation areas and optimal quantity of cotton procurement are being adopted as risk management strategies.

Most of the organised players in the industry are highly mechanised, thus power and fuel cost is a significant component of the operating costs (10-15%), next to raw material cost. The quantum and nature of power availability for smaller players is primarily dependent on government provisions. To address power related risks, large manufacturers are increasingly relying on captive power generation plants.

Though the cotton yarn industry is labour intensive and availability of cheap and skilled manpower is a constant challenge for the industry, the labour cost of the organised players is low on account of highly mechanised operations (labour cost constitutes about 8-12% of the cost). However, any change in government regulations or legislation governing labour laws tend to directly impact the cost of production.

Acuité believes that the dependence of the industry on cotton, raw material prices, fuel costs and availability of skilled labour pose moderate risk to the cotton yarn industry in terms of input costs.

Regulatory Risk


The government has taken several initiatives to promote the textile and apparel industry. This includes a significant and increased allocation in the Union Budget 2018-19 towards Amended Technology Upgradation Fund Scheme (A-TUFS), allocation for Remission of State Levies, Scheme for Integrated Textile Parks and Make in India campaign, among others.

The introduction of Goods and Services Tax (GST) is expected to result in ‘fibre-neutrality effect’, which means that all man-made and natural fibres will be treated equally from the tax point of view. The GST rate on cotton yarn is 5%; a low and uniform GST is expected to lead to further standardisation of cotton yarn industry.

The cotton yarn industry is governed by various environmental laws and regulations at central and state government levels relating to environmental protection at the manufacturing units. Stricter laws and regulations may also impose new liabilities or require additional investment in related equipment and processes.

The cotton industry is geographically concentrated around the cotton producing states and is therefore dependent on the general economic conditions and policies relating to textile industry in the respective states. While the central and state governments have provided several incentives to the textile sector, the industry faces the risk of introduction of new policies or regulations and removal of schemes and subsidies applicable to yarn and downward linked industries of cotton textiles and garments.

Acuité believes that with favourable government initiatives and substantial support, the regulatory risk faced by the cotton yarn industry is low in the medium term.

Technology Risk


The Indian spinning industry is considered to be the most modern and efficient in the world. Modern machines are imperative for manufacturers to manage costs, productivity and quality, especially for those catering to export markets. Constant induction of state-of-the-art technologies such as compact spinning, most advanced yarn processing technology and high-precision process control tools such as electronic cleaners, auto slavers, splicers, two-for-one twisters and auto-coners, have given a clear competitive advantage to the Indian spinning mills.

During FY11-FY15, there were lower capacity additions in the spinning industry due to volatile demand and prices of cotton and cotton yarn. Going forward, during FY18-FY21, capacity additions are expected to slow down due to overcapacity, subdued demand and lowered central government benefits due to changes in the TUFS.

Acuité believes that in the medium term, the industry faces moderate risk on account of advancement in technology and related capital expenditure for upgradation.

Operating Margin


In terms of Net Sales, the cotton yarn industry witnessed an average annual growth of about 5.6% in the last three years - FY 2015-16 to FY 2017-18. Average EBITDA margins dropped from 19.4% in FY 2015-16 to 13.8% in FY 2017-18. This was due to short-term decline in export demand from key markets such as China, and demonetisation. Dependence on the agricultural climatic conditions, volatility in input costs, working capital costs and high competition are the key variables.

Interest Coverage


The interest coverage declined marginally from 3.95 times in FY 2015-16 to 3.54 times in FY 2017-18. The average interest coverage during the period FY 2015-16 to FY 2017-18 was 3.96 times. While the sector is moderately leveraged, interest coverage remains favourable due to high operating margins of the players.

Return on Capital Employed


ROCE ratio declined from 6.7% in FY 2015-16 to 5.1% in FY 2017-18 with an average of 6.5% during the three year period. This is on account of capital intensive nature of the business.

Debt / Equity


The cotton yarn industry showed a stable and favourable debt-equity ratio with an average of 0.84 times, during the three-year period of FY 2015-16 to FY 2017-18. The industry average was at 0.76 times in FY 2017-18.

GCA Days


The industry presented a moderately favourable liquidity profile in terms of Gross Current Assets with an average of 135 days for the three-year period of FY 2015-16 to FY 2017-18. For the FY 2017-18, the industry had an average GCA of 145 days.

Industry Financials and Industry Average

Fact Sheet (As on Year Ended March 31st)SUM Unit 201803 201703 201603
Net Sales Rs. Cr. 18,598 18,224 16,733
OPBDIT (Excl. NOI) Rs. Cr 2,573 3,979 3,254
Depreciation Rs. Cr. 986 1,098 1,086
PAT Rs. Cr. 910 1,320 1,171
Net Cash Accruals Rs. Cr. 1,897 2,418 2,257
Networth Rs. Cr. 9,727 8,980 8,051
Total Debt Rs. Cr. 7,398 7,040 8,106

Average Unit 201803 201703 201603
EBITDA Margin % 13.8% 21.8% 19.4%
PAT Margin % 4.9% 7.7% 7.0%
ROCE % 5.1% 7.7% 6.7%
Interest Coverage Times 3.54 4.74 3.95
Debt to Equity Times 0.76 0.78 1.01
Debt to EBITDA Times 2.88 1.77 2.49
GCA Days Days 145 120 140

The entities considered in the static pool are as under:

  1. K P R Mill Ltd.
  2. Nahar Industrial Enterprises Ltd.
  3. Nahar Spinning Mills Ltd.
  4. Nitin Spinners Ltd.
  5. Trident Ltd.
  6. Vardhman Polytex Ltd.
  7. Vardhman Textiles Ltd.

IRS Definitions

Acuité Industry Risk Scores are assigned on a six-point scale, with 1 indicating ‘High Risk’ and 6 indicating ‘Highest Safety’. The intermediate scores are defined in the table below:

Industry Risk Score Risk classification of the Industry
ACUITE IRS 1 Highly Unfavourable
ACUITE IRS 2 Unfavourable
ACUITE IRS 3 Neutral
ACUITE IRS 4 Marginally Favourable
ACUITE IRS 5 Favourable
ACUITE IRS 6 Highly Favourable


Acuité IRS should not be treated as a recommendation or opinion that is intended to substitute for a financial adviser's or investor's independent assessment of whether to buy, sell or hold any security of any entity forming part of the industry. Acuité IRS is based on the publicly available data and information and obtained from sources we consider reliable. Although reasonable care has been taken to ensure that the data and information is true, Acuité, in particular, makes no representation or warranty, expressed or implied with respect to the adequacy, accuracy or completeness of the information relied upon. Acuité is not responsible for any errors or omissions and especially states that it has no financial liability whatsoever for any direct, indirect or consequential loss of any kind arising from the use of Acuité IRS.

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