High crude prices to shrink polyester yarn makers' profits: Crisil

Polyester yarn volumes are expected to decline by 2-3% this fiscal due to rising crude-linked input costs. While manufacturers will cautiously raise prices, this will squeeze operating margins by 100-150 basis points, according to Crisil.

Polyester yarn manufacturers are expected to see volumes decline by 2-3 per cent this fiscal as higher crude-linked input costs arising from the West Asia conflict increase production costs, while cautious price hikes to protect demand are likely to weigh on profitability, according to Crisil. The agency said crude prices are expected to average around 15 per cent higher this fiscal at USD 80-85 per barrel, directly increasing the cost of key raw materials.

However, manufacturers are expected to adopt a measured approach to passing on these costs, resulting in average realisations rising by only 6-7 per cent as companies prioritise preserving volumes. Crisil Ratings said the strategy is expected to reduce operating margins by around 100-150 basis points this fiscal, with operating margins likely to decline to 5.0-5.5 per cent from around 6.5 per cent last fiscal. The assessment is based on an analysis of 20 companies accounting for around 40 per cent of the sector's revenue.

Impact of Market Disruptions

"West Asia conflict-related disruptions and consequent weak demand in the downstream textile segment affected polyester demand significantly (~20% volume dip) in the first quarter of the current fiscal. In an effort to recoup lost volumes, players are expected to adopt a measured approach while passing on input cost increases to consumers, thereby limiting volume de-growth to ~2-3% for this fiscal," said Shounak Chakravarty, Director, Crisil Ratings.

Financial Health and Credit Outlook

The agency said lower profitability is expected to reduce cash accruals by 12-13 per cent this fiscal. However, operating cash flows are likely to remain stable as manufacturers reduce inventory holdings by around 25 days, bringing average inventory levels down to about 30 days, thereby lowering working capital requirements.

It added that capital expenditure is expected to remain modest and largely limited to routine modernisation and completion of ongoing expansion projects, keeping incremental debt under control.

According to Crisil Ratings, lower working capital requirements and modest capital expenditure are expected to support credit profiles despite weaker operating performance. Interest coverage is projected to moderate to 3.5-3.6 times from around 4.3 times last fiscal, while net cash accruals to total debt are expected to decline to about 22 per cent from 26 per cent.

Looking ahead, Crisil Ratings said the extent of volatility in crude-linked raw material prices and the industry's ability to balance price increases with volume stability will remain key factors to watch this fiscal. (ANI)

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