FY10 so far has been reasonably good for the Indian textile industry as the export demand from the US and Europe have shown an uptick and realizations have been better for the larger players due to vendor consolidation. However, the forex losses due to the volatility in the rupee against the US dollar as well as higher interest costs going forward are key risks to the sector. The Clothing Manufacturers Association of India (CMAI) estimates that 500,000 to 600,000 jobs are at risk. As exporters struggle to secure profitable orders, the Ministry of Textiles' US$ 25.1 bn export target for the fiscal year seems well beyond reach. Companies are also trying to add niche value-added material to their product mix to stabilise their margins. Some firms that have ventured into retail chains are finding rising commercial real estate prices an impediment to their ability to roll out with the speed necessary to attain critical mass.
Union Budget 2010-11 offered very little scope to the textile sector to improve its profitability. Non extension of discounted interest rates offered to the sector for its capacity addition will mean even higher interest costs for the companies that do not complete their capex borrowing by the due date. The rollback of tax sops will also mean higher effective tax rates for the players in the sector.
Budget Measures
An extensive skill development programme in the textile and garment sector is to be
launched by leveraging the strength of the Textile Ministry to train 3 m individuals over 5 years.
Surcharge on domestic companies reduced to 7.5% from 10%
Increase in the rate of Minimum Alternate Tax from 15% to 18% of book profits
Budget Impact
Companies that do not complete their capex related borrowing by the due date of March 31, 2012 will have to incur higher borrowing cost as the interest subvention under the Technology Upgradation Fund (TUF) will expire by that date.
Addition of skilled workers will help companies in the sector increase their value added product offerings and garner better realisations.
Higher taxes will eat into the profits of the sector.
Company Impact
Companies like Raymond, Arvind and Alok Industries that have presence in textile retailing may benefit from higher disposable incomes in the hands of domestic consumers.
Most companies in the sector are highly leveraged and may have to cap their capex plans until FY12.
FY10 so far has been reasonably good for the Indian textile industry as the export demand from the US and Europe have shown an uptick and realizations have been better for the larger players due to vendor consolidation. However, the forex losses due to the volatility in the rupee against the US dollar as well as higher interest costs going forward are key risks to the sector. The Clothing Manufacturers Association of India (CMAI) estimates that 500,000 to 600,000 jobs are at risk. As exporters struggle to secure profitable orders, the Ministry of Textiles' US$ 25.1 bn export target for the fiscal year seems well beyond reach. Companies are also trying to add niche value-added material to their product mix to stabilise their margins. Some firms that have ventured into retail chains are finding rising commercial real estate prices an impediment to their ability to roll out with the speed necessary to attain critical mass.