Textiles Sector Analysis Report 

• US and European markets dominate the global textile trade, accounting for 64% of clothing and 39% of the textile market. With the dismantling of quotas, global textile trade is expected to grow (as per McKinsey estimates) to US$ 650 bn by 2010 (3-year CAGR of 10%). However, as against expectations, in the post-quota regime, the resurgence in exports to the now unregulated markets took off rather slowly.
• India's overall market share at 5.7% in April 2009 was at an all-time high, while that of China's has declined over the past couple of months. Also, India's average realization per metre has improved in recent months.
• Post quota (FY05 – FY09) India has witnessed the third highest growth in apparel exports to the US after Indonesia and Vietnam, while China lags behind.
• India enjoys a significant lead in terms of labour cost per hour (US$ 0.6 in 2004), over developed countries like US (US$ 15.1) and newly industrialised economies like Hong Kong (US$ 5.1), Taiwan (US$ 7.1), South Korea (US$ 5.7) and China (US$ 0.9). Also, India is rich in traditional workers adept at value-adding tasks, which could give Indian companies significant margin advantage. However, India's inflexible labor laws have been a hindrance to investments in this segment. Unlike in home textiles, garment capacities are highly fragmented and leading Indian textile companies have been slow to ramp up their apparel capacities, despite strong order flows from overseas buyers who are trying to diversify out of China.
• Several Indian textile companies have formed alliances with their global counterparts, particularly those with strong front-end capabilities, in a bid to access global markets, tap technological know-how, design skills and branding and retailing ability. The alliances have been struck in most cases by way of JVs or stake acquisition. Tie-up with overseas companies will help them move up the value chain and focus on the more lucrative branding and retailing business.

• Supply
• The supply of denim has nearly doubled in the last 15 months. Most new capacities in the apparel and home textile segments are not operating at full capacities.
• Demand
• High for premium and branded products due to increasing per capita disposable income.
• Barriers to entry
• Superior technology, skilled and unskilled labour, distribution network, access to global customers
• Bargaining power of suppliers
• Because of over supply in the unorganised market like that of denim, suppliers have little bargaining power. However, premium products and branded players continue to garner higher margins.
• Bargaining power of customers
• Domestic customers - Low for premium and branded product segments.
  Global customers- High due to presence of alternate low cost sourcing destinations
• Competition
• High. Very fragmented industry. Competition from other low cost producing nations is likely to intensify.

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• After reasonable growth in FY07 and FY08, companies in Indian textile sector bore the brunt of poor domestic sales, low export volumes and high raw material costs in FY09. Instead of gaining from the rupee’s depreciation in the last fiscal, companies suffered foreign exchange losses due to their hedging mechanism. Indian textiles companies took recourse to measures such as replacing US dollar denominated export orders with other currencies, increasing revenue from value-added products, and diversifying into other emerging export markets.
• Most companies in the sector timed their expansion plans FY04 onwards, so as to avail themselves of the funding under TUF (Technology Upgradation Fund, offering loans at 6% subsidy). This led to the capex-spending phase in the textile sector peaking in the last two fiscals. However, with the slump in demand for textile products from the overseas markets, a number of companies had to defer their expansion plans due to large under-utilised capacities. With the FY08 Union Budget allowing the scheme to continue during the 11th plan (2007- 2012), the smaller players in the sector would, however, continue to benefit. We believe that despite lower interest rates, players in the sector would have to wait until the new capacities stabilise and the utilisation levels get normalised, before leveraging more.
• The global textile industry also faced the brunt of economic slowdown in FY09, wherein, exports to the US from two of its largest suppliers India and China dipped in terms of value and volumes respectively. While India sustained volumes because of better product quality as compared to China, it lost out in terms of realizations. Competitors like Vietnam, Bangladesh and Indonesia gained substantially because of relatively lower labour costs.
• Total denim capacity in India has nearly doubled in the last few years, resulting in a prolonged slump in the domestic market. Most new entrants (largely catering to the unorganised market) are incapable of producing export-quality denim and have resorted to dumping their produce in the domestic market resulting in further drop in prices in FY09. Dependence on exports for vending a large part of turnover has cost the Indian textile companies foreign exchange losses due to the rupee appreciation.
• The Budget proposed allocations of funds to the scheme for Integrated Textiles Parks that will facilitate setting up of dedicated textile hubs.

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• Most large textile companies in India, realising the growth potential in domestic retailing, have drawn up aggressive strategies to expand their footprint in the domestic market. These include companies like Welspun and Himatsingka, which were traditionally export-oriented, as also Raymond, which has been the pioneer in domestic textile retailing.
• Although home textile companies have recently been aggressive on the capacity expansion front, realisations have remained stable. But as new capacities come on-stream and utilisation levels pick up, this is unlikely to continue. This is because although India continues to feature amongst the lowest cost producers for the US and EU markets, competitors like Pakistan and Turkey are cannibalising its market share. Moreover, with the possibility of slowdown in the western economies looming large, a slowdown in demand cannot be ruled out.
• With retailers like Wal-Mart, JC Penney and GAP planning to substantially increase their outsourcing from India and FDI in single brand retailing making its way into the country, the opportunities for domestic apparel exporters are immense. As per the Government of India targets, while India's textile export is poised to grow from US$ 13 bn (3.3% of world textile trade) to US$ 50 bn (8.9%) by FY10, at a CAGR of 21%, its share in apparel and garment exports are set to double and triple respectively until FY10. However, oversupply led pricing pressures and forex losses continue to mar the long-term earnings visibility of the textile companies.
• India and China are currently competing in the same categories (premium segment) of apparels and home textiles and given India’s established presence in the high end segment, India could gain significant market share in US apparel imports. However, the ongoing economic slowdown in the US could result in lower orders from US retailers that, in turn, may result in lower capacity utilisation and impact profitability of textile companies in India.

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Related Links for Textiles Sector
Quarterly Results | Sector Quote | Over The Years