The Indian cotton spinning sector is expected to log a 25-30 per cent year-on-year decline in revenue and a 300-400 bps contraction in operating margin in FY2021 amid the COVID-19 led disruptions in manufacturing activities and an all-encompassing weakness in demand from the downstream segments, within as well as outside the country, according to ICRA.

"While the industry was pinning its hopes on a gradual recovery in cotton yarn exports from Q4 FY2020 onwards, aided by the softening of domestic cotton prices, the COVID-19 pandemic prolonged the ongoing tough times for the domestic cotton spinners, with the sector being set to witness a second consecutive year of declining growth and contraction in margins," the credit rating agency said in its July 2020 report on the Indian cotton spinning industry.

The risk (to the cotton spinning sector) is heightened owing to the inventory pile-up being witnessed across the value chain, which may keep demand from the downstream segments subdued over the next few quarters, while keeping working capital requirements high.

To ensure continuity of business, the RBI announced a relief package on March 27, 2020, followed by another package on May 23, 2020, which allowed lenders to extend a six-month moratorium on payment of term loan instalments and interest on working capital to entities, and recalculate drawing power by reducing the margins and/or by reassessing the working capital cycle.

"Although the measures announced by the RBI are expected to provide a temporary liquidity support to entities to withstand the impact, a recovery thereafter remains contingent on containment of COVID-19," the report said.

ICRA expects demand from the downstream segments in the domestic as well as the export markets to remain weak in Q2 FY2021 and recover gradually over several months during H2 FY2021. As a result, ICRA expects the performance of domestic cotton spinners to be severely hit in FY2021.