CRISIL predicts a 100-150 basis points improvement in profitability for polyester yarn manufacturers in FY25

As the quantity of affordable polyester yarn and fabric imports from China continues to decrease, domestic polyester yarn manufacturers can expect a revenue increase of 3-5 per cent this fiscal year, following a period of stagnant growth last fiscal year.

According to a recent report by CRISIL Ratings, India's polyester yarn manufacturers are set to experience a significant improvement in operating profitability by 100-150 basis points (bps) this fiscal year, reaching 7-8 per cent. This positive development can be attributed to the government's proactive measures to restrict the influx of cheaper competing products.

In response to the surge in imported polyester yarn from China, the Indian government introduced a Quality Control Order (QCO) in October 2023, making BIS certification mandatory for imported yarn. Despite the fact that India's import of polyester yarn increased to 12 per cent in fiscal 2024 from 7-8 per cent in previous years, domestic manufacturers faced pricing pressure to stay competitive with imported products.

To combat the impact of the QCO on polyester yarn, China shifted its focus to exporting more affordable polyester fabric to India. In response to the surge of these imports, the Indian government implemented a minimum import price (MIP) of $3.5 per kg on synthetic knitted fabric in March 2024 to control the influx of uncompetitive imports.

CRISIL Ratings conducted an in-depth analysis of 20 polyester yarn manufacturers, representing approximately 40% of the sector's revenue, to derive these conclusions.

"The combined impact of government interventions will provide a significant advantage to domestic polyester yarn producers. This is evident in the 61% reduction in polyester yarn imports during the seven months ending in May 2024, following a 92% increase in the previous seven months. Additionally, the imports of synthetic knitted fabric experienced a notable decline in April-May compared to the previous year.

As a result, the operational profitability of polyester yarn producers is expected to rebound this fiscal year, approaching levels seen before the pandemic. With stable demand downstream and restrictions on imports, the margin between yarn and its raw material is projected to increase to Rs 24-25/kg in fiscal 2025 from Rs 23/kg in the previous fiscal," stated Gautam Shahi, Director at CRISIL Ratings Ltd.

Furthermore, as the volume of lower-priced polyester yarn and fabric imports from China diminishes, the revenue of domestic polyester yarn manufacturers is anticipated to grow by 3-5% this fiscal year, following a stagnant performance in the previous year. This, coupled with the recovery in operating margins, is forecasted by CRISIL to lead to a 20-25% increase in cash accruals this fiscal year, marking a turnaround from the moderation observed in the past two fiscal periods.

The financial health of polyester yarn manufacturers is set to bounce back this fiscal year, as debt protection metrics are poised to improve. With enhanced cash flow and restrained capital spending, the credit profiles of industry players are expected to strengthen, according to Pranav Shandil, Associate Director at CRISIL Ratings Ltd.

Furthermore, the industry's capacity utilization stands at a steady 65-70%, negating the necessity for significant capital expenditures. However, potential challenges such as demand fluctuations, volatile raw material prices, and regulatory shifts in the polyester yarn sector will be closely monitored moving forward.

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