The domestic cotton spinning sector is set to rebound in FY25 with an anticipated growth of 6-8 percent, driven by modest increases in realisation and a 4-6 percent rise in volume, as per a report by ICRA. This marks a recovery after nearly two years of decline due to falling yarn prices and muted domestic demand.

Over two-thirds of all cotton yarn produced is used domestically, with recovering downstream industries such as home textiles and ready-made clothing beginning to show signs of revival. After a growth spurt on a reduced base in FY24, exports are expected to normalise in FY25. Although global demand remains sluggish, a shift in sourcing preferences away from other countries will mitigate the impact on exports.

K Srikumar, Senior Vice President and Co-Group Head, Corporate Sector Ratings, ICRA, notes, gross contribution margins for spinners, which contracted sharply by approximately 20 percent Y-o-Y in FY24 amid weak domestic demand, recovered by an estimated 5 percent in Q1 FY25. This recovery trend is likely to continue throughout FY25. Consequently, operating profit margins are expected to expand by 100-150 basis points, supported by scale benefits and cost-saving measures undertaken by industry players.

The past two years saw a dramatic decline in domestic cotton prices, which peaked in H1 FY23 at a lifetime high of Rs 284 per kg. With a recovery in demand and an anticipated decrease in the area planted to cotton, average prices, which fell by about 26 percent Y-o-Y in FY24 due to a decline in world prices and weak demand from end-user groups, are expected to rise slightly in the near future.

ICRA alaoexpects a slight increase in capital expenditure announcements in FY25, driven by the need to modernise machinery, demand from the China Plus One strategy, and strengthening domestic demand from downstream garment companies.