Operating profits of polyester yarn firms to rise 15-20% in FY21: Crisil

Operating profits of polyester yarn manufacturers are set to rise 15-20 per cent next fiscal because of a 150-200 basis points’ (bps) spurt in operating margins stemming from lower raw material prices, healthy demand for polyester, and higher blending in garments and other products, an analysis of 45 Crisil-rated polyester yarn manufacturers shows.

Raw material cost has started moderating because the outbreak of coronavirus is likely to impact demand for polyester yarn in China, which accounts for 65 per cent of global demand. As a consequence, the price of purified terephthalic acid (PTA) – a key raw material that accounts for more than half of the sales price of polyester yarn – is expected to be under pressure in the near term. Moreover, PTA capacities in Asia are set to rise 20 per cent over the next couple of years, which will keep prices in check. Add to that the removal of anti-dumping duty announced by the Government of India on February 2, 2020.

In October 2013, the government had imposed a duty of $23-160 per tonne of PTA imported from various countries. This gave domestic manufacturers significant bargaining power. The removal of duty will make India’s PTA imports (10 per cent of total PTA demand) cheaper by $25-30 per tonne, given more avenues for sourcing. Consequently, input cost for polyester yarn manufacturers would be ~3-4 per cent lower, with PTA prices seen down Rs 2,000-3,000 per tonne. Falling prices and adequate availability of PTA will, in turn, help polyester yarn manufacturers step up production and utilisation levels too, given healthy demand and better export competitiveness.

As of fiscal 2019, India’s total PTA manufacturing capacity was 6.3 million tonne (MT) and total PTA demand 6.9 MT – resulting in 10 per cent of demand being met through imports. Constraints in domestic availability of PTA had limited capacity utilisation at yarn manufacturers to 75-80 per cent. Moreover, any disruption in supply chain or production of polyester yarn in China, which has a global exports share of 50 per cent, may provide higher export opportunity to Indian polyester yarn manufacturers.

Says Anuj Sethi, Senior Director, Crisil Ratings, “Given the high degree of competition, polyester yarn manufacturers will have to pass on a part of the cost savings to the end-consumers. However, their operating profits should get a 15-20 per cent boost even if they retain half of it. We expect operating profitability will improve to 11-11.5 per cent in fiscal 2021 (9-9.5 per cent in fiscal 2020). The benefit will be more for large and mid-sized companies, which typically have better bargaining power.”

Additionally, there is a headroom for growth as polyester yarn is a cheaper substitute for cotton and other fibres. And though polyester blending in India has increased by 500 bps to 45 per cent in the last three fiscals, it is still lower compared with the global average of 60 per cent. Meanwhile, the improvement in credit metrics, riding on better operating performance in the last three fiscals, is expected to sustain. Says Sushant Sarode, Associate Director, Crisil Ratings, “For polyester yarn manufacturers, interest coverage ratio is expected to improve to 4.3 times in fiscal 2021, compared with 3.4 times in fiscal 2019. With sufficient capacity available, capex intensity is expected to be lower. Better cash generation and progressive debt repayment, will support the improvement in credit metrics.”