Manufacturers of polyester yarn are expected to witness a 2-3% de-growth in volumes in the current fiscal as the prolonging West Asia war has impacted the sourcing of critical crude oil-linked raw materials. According to Crisil Ratings report, the manufacturers are taking cautious step before passing on the increased rate of crude oil to their customers as the price of petroleum has gone up by 15%, hovering around $80-85 per barrel, and they are prioritising volume preservation.
The report also said that the manufacturers will take calibrated approach before raising the price by 6-7% in the near future. This strategy will come at the cost of operating margins, which are expected to decline by 100-150 basis points (bps) thereby impacting cash accruals.
Nevertheless, the impact on operating cash flows will be limited as manufacturers are expected to reduce inventory holdings amid heightened price volatility. Consequently, lower working capital borrowings coupled with modest capex spends will ensure balance sheets remain under control despite some moderation in debt protection metrices.
According to industry experts, demand for polyester has dipped to 20%, which is a significant fall. “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 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.
However, as crude-linked raw materials, including purified terephthalic acid (PTA) and monoethylene glycol (MEG), account for 60-65% of revenue, this strategy will impact operating margins. Consequently, same is expected to fall to 5-5.5% this fiscal from 6.5% last fiscal,” said Shounak Chakravarty, Director, Crisil Ratings.
Additionally, capex needs are expected to remain modest and limited to routine modernization and completion of prior year expansion plans. As a result, incremental debt addition is expected to remain contained.
“Expected moderation in operating performance is likely to impact debt protection metrices of polyester yarn manufacturers this fiscal. While interest coverage is expected to moderate to an estimated 3.5-3.6x from ~4.3x in the previous fiscal, net cash accruals to total debt will fall to 22% from 26% last fiscal. That said, lower working capital needs and modest capex requirement will support credit profiles,” said Pallavi Singh, Associate Director, Crisil Ratings.