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Textiles: Growth at 'home'!

May 12, 2006

The domestic textile industry is yet at the inflection point from where it needs to take off and capitalise on the export opportunities in the post quota regime. What however, has caught the 'apparel' players off guard is the fact that while they awaited for the quotas to get lifted, to embark on their capex plans, the cycles (like the denim cycle) have turned and new competitors have emerged. In such a scenario, their counterparts in the 'home textiles' segment seem to be better geared. Home textile capacities in the EU and the US are shrinking due to the lack of competitiveness. This downscaling, and the dismantling of quotas, is likely to create additional markets estimated at US$ 1.3 bn in towels and US$ 1.8 bn in bed linen for the rest of the world. With outsourcing now becoming the norm amongst global textile retailers, and the EU and US imposing export limits on China, Indian home textile industry stands to benefit. Moreover, global retailers are looking at reducing their dependence on a single country for supply. Given Indian companies' strong brand equity in the US home textile market, organised players in this segment have lots to look forward to.

Geared with expanded capacities...
Indian home-textile companies have expanded rapidly across the value chain to take advantage of the emerging growth opportunities. The bulk of the capacity expansion has been commissioned over the past three fiscals with the help of low cost funding through the TUF (textile upgradation fund) route. The expanded capacities have not only enabled the players in this segment to meet bulk orders but also customise their products as per the demand.

Progress in TUFS since inception...
Rs bn Applications received Applications sanctioned sanctions/
approvals
No. of appli. Project cost Loan amt. No. of appli. Project cost Loan amt.
FY00 407 57.7 30.8 309 60.5 24.2 78.6%
FY01 719 63.0 38.8 616 52.3 20.9 53.9%
FY02 472 19.0 10.8 444 15.7 6.3 58.2%
FY03 494 18.4 10.3 456 14.3 8.4 81.6%
FY04 867 33.6 19.1 884 32.9 13.4 70.2%
FY05 986 79.4 35.3 986 73.5 29.9 84.7%
9mFY06 798 59.8 50.1 804 56.0 22.1 44.1%
As at Dec'05 4,743 330.8 195.2 4,499 305.2 125.2 64.1%
Source: Ministry of Textiles

Value addition - route to higher price realisations
India is the largest supplier of terry towels (with 21% market share) and the third largest supplier of bed linens (with 19% market share) to the US. India's thrust on value addition, which was earlier an attempt to differentiate itself from China, which focuses on volumes and lower prices, has stood in good stead. Indian home textile companies have strived to offer better value-added products, such as higher thread count bed linen, innovative varieties in terry towels and a wider product range in decorative bed-sets. This approach has yielded them higher realisations and better profit margins compared to that of regional peers.

Also, while the lifting of the quotas lowered price realisations across most countries in the South East Asian region, the impact on Indian companies was subdued, thanks to their customised product offerings. In fact, India is one of the few destinations where product prices were impacted only marginally in the post quota regime.

Not just the dragon threat!
China responded to the dismantling of the quota system with a surge in textile exports that led to a shake-up in the US market. The US, therefore, re-imposed quotas on terry towels from China, which augured well for India. Further, this prompted global retailing giants to diversify their outsourcing strategy.

Export of pillow cases to US
US$ m 2003 2005 CAGR
Pakistan 12,827 69,345 133%
China 15,462 58,321 94%
India 27,188 47,375 32%
Turkey 6,754 11,734 32%
Israel 7,672 8,219 4%
Source: Office of textiles and apparels (US)
Nonetheless, what should worry the Indian home textile companies is the fact that competition in this segment is also brewing and neighbouring countries such as Pakistan and Bangladesh are catching up faster. To put things into perspective, the export of pillowcases to the US from Pakistan grew 4 times faster than India in the last 3 years (see adjacent table). This is also because Pakistan enjoyed a preferential entry into the US and EU markets during the quota regime and has the advantage of being one of the largest cotton producers in the world. Further, the Pakistan government is encouraging the industry with a 6% R&D subsidy. Countries like Turkey and Bangladesh are also giving India a tough fight in the lower value home textile segment.

To conclude...
The home textile segment is well leveraged to drive the growth in the domestic textile industry. Besides export opportunities, longer fabric cycles (as compared to the apparel cycles) and fewer design variations make the business better hedged as compared to the apparel business. It only remains to be seen whether the organised players in this segment can timely exploit the latent opportunities or lag behind their regional peers.

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