The Indian Viscose Staple Yarn (VSY) industry is expected to grow 10-12% YoY, reaching a record revenue of over $2.5 billion this fiscal year, according to CRISIL Ratings. 

Despite declining yarn prices compared to raw materials, VSY manufacturers are projected to improve overall profitability by 200-300 basis points due to strong balance sheets and improved cash flows, supporting credit risk profiles despite significant debt-funded capital expenditure. 

CRISIL's analysis shows VSY's attractiveness as an alternative to cotton yarn, with a compound annual growth rate of 13% over the last three fiscal years, higher than cotton yarn's 5% growth. VSY prices remained stable between Rs 200 and Rs 250 per kg, while cotton yarn prices fluctuated between Rs 200 and Rs 380 per kg. The removal of anti-dumping duty on VSF imports in fiscal 2022 contributed to VSY's increased share of the spinning industry volume, surpassing 10% last fiscal year. 

CRISIL Ratings Ltd, predicts 15% growth in viscose spinners' volume this fiscal year, driven by domestic and export demand revival. The operating margin is likely to reach 11-12%, as VSY makers' revenue improves and spreads between VSY and VSF expand to Rs 55-58 per kg. 

The margin is projected to recover as major raw material prices moderate towards steady-state levels of 12-13%. VSY makers are expected to add ~15% capacity this fiscal year, funded by a 1:1 debt-to-equity ratio. Gearing is expected to improve to 0.85 times by March 2024, and the interest coverage ratio is expected to be 6 times this fiscal year, driven by higher profitability. 

However, any adverse impacts from anti-dumping duties on VSF or lower demand will be monitored closely.