Textiles Sector Analysis Report 

• The Indian textile sector had all the tailwinds the businesses needed, over the last two to three years, to grow and become more profitable. Right from higher export demand to lower cotton prices to falling interest rates to favourable exchange rates, the companies had everything going in their favour. The industry employs about 40 million workers directly and 60 million indirectly. India's overall textile exports during financial year 2015-16 stood at US$ 40 billion.
• As per the Ministry of Textiles, the Indian textile industry contributed about 14% to industrial production, 4% to the country’s GDP and 13% to the country's export earnings in 2016.
• According to the Ministry of Textiles, the domestic textile and apparel industry in India is estimated to reach US$ 223 bn by 2021 from US$ 108 bn in 2015. Total cloth production in India is expected to grow to 112 bn square metres by FY17 from 64 bn square metres in FY15.
• India enjoys a significant lead in terms of labour cost per hour over developed countries like US and newly industrialised economies like Hong Kong, Taiwan, South Korea and China.
• As per data from National Bureau of Statistics, due to steep wage inflation, the average monthly wage cost in China stood at US$ 230 per month in 2013 as against US$ 80 per month in India. 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.
• The textile industry aims to double its workforce over the next 3 years. As a thumb rule, for every Rs 1 lac invested in the industry, an average of 7 additional jobs is created.
• Even at GST rate of 12%, the textile sector is likely to be negatively impacted. The cotton value chain is likely to be the worst affected as it is currently attracting zero central excise duty.

• Supply
• Despite some pick-up in demand from both global and domestic markets, 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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• Textile exports did remarkably well in an otherwise dull exports scenario in FY16. A weaker rupee and firm overseas demand helped the sector add US$ 40 bn to overall exports of US$ 310 bn, second only to engineering goods. Readymade garments, which accounts for nearly half of all textile exports at US$ 14.9 bn, grew 15.5%.
• Relatively lower cost of cotton helped the margins of export dependant textile industry in FY16. However, since these trends are temporary in nature, pressure on margins could increase the debt levels for players in the sector.

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• The Trans-Pacific-Partnership (TPP) a duty free trade agreement between 12 nations may impact the Indian textile and garment export sector negatively and put Indian textile exports of around US$ 40 bn at risk over the medium term. The TPP member nations led by the US account for 40% of world trade and the deal gives them duty free access to each other, and makes imports from other countries uncompetitive.
  
  The key nations out of the 12 countries which India exports textile and apparels to are US, Japan and Canada. The value of India's textile and apparel exports to these three countries stood at over US$ 12 bn in FY16 which is likely to reduce due to the TPP. US is a key destination for textile and apparel exports, and US import duties range between 15% to 50%, depending upon woven or knit textile, or type of raw material used, which can lead to loss of export sales for India, especially detrimental to companies which are exporting majorly to the US. Companies with superior geographic diversification are better placed.
• Exclusion of India's clothing products from US GSP benefits is yet another source of comparative disadvantage for the sector.
  
  If this was not enough, to comply with its commitments to WTO, India will soon have to phase out its export incentives — latest by 2018. India has already achieved a per capita GNP of US$ 1,000 at 1990 prices. India's global export share in textile and clothing has already crossed 3.25% threshold required by WTO to be termed as export competitive with obligation to phase out export subsidies.
• The adverse impact of demonetisation on disposable incomes and hence consumer spending will result in poor demand for apparels in second half of FY17. The resulting inventory accumulation with the retailers will, in turn, cause deferment of purchases from apparel and home-textile manufacturers (focused on domestic market) in the near term, besides resulting in stretched payments. This, in turn, will affect the cash flow of the textile industry and is likely to drive a constraint in the demand for the entire textile value-chain.
  
  While textile retailers are facing the immediate impact, the impact on apparel manufacturers and other intermediaries in the value chain is expected to be felt with a lag of a few quarters. The overall impact on the sector, however, is expected to be limited as one-third of the Indian textile industry is estimated to be export focused (directly or indirectly). Also, as the demand reverts back to a steady state over the next few months with expected improvement in liquidity, this impact will be neutralised.

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