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Textile: Beleaguered with risks?

Jun 29, 2007

In FY07, India's textile and apparel exports grew at a modest pace of 7.7% YoY to reach US$ 19 bn (nearly one-fifth of total exports). However, growth in the two key markets of the US and the EU at 9% and 15% YoY, respectively during 2006, was relatively stronger. While the export of apparels and home textiles to the US grew at a faster clip, products like woolen and embroidered fabrics and apparels witnessed very marginal growth in demand.Having said that, the biggest worry for the textile majors was the strengthening of the rupee against the US dollar, especially at a time when the currencies of some of India's low-cost neighbours were depreciating. The trend in the FY07 results of the textile companies, underscores this concern, as rising input costs, pressure on volume as well as realisations and high interest costs weighed on their bottomline. The detrimental movement of the rupee left no room for relief from these woes.

TUF tradeoff...

FY06 being the first year of post quota regime was the inflection point in Indian textile exports (as is evident from the tables below). Lower interest costs and better operational cash flows facilitated this. The textile up-gradation fund (TUF) that allowed the sector an access to subsidised debt, was nevertheless, not streamlined into profitable venues. While the bigger players in the sector expanded capacities across the value chain, the smaller players did not focus on expansion of value adding capacities (apparels and ready made garments).

Resultantly, the fabric exports that were never under the quota regime faced problem of excess capacities and lower realisations (with capacities having nearly doubled in the last 2 years) while capacities for apparels that were restricted by the quotas were not adequately commissioned. In the Union Budget 2008, the TUF scheme has been extended for the next five years (until FY12). However, with the firmness in interest rates, excess leverage and low pricing power would be a losing game for the textile companies.

Cotton textile exports
FY03FY04FY05FY06FY075-yr CAGR
Rs bn16.2 15.6 15.5 17.1 18.5 3.4%
Growth -4%-1%10%8%
Source: Arvind Mills
Indian apparel exports (US$ m)
FY03FY04FY05FY06CAGR
Knits2,837 2,702 2,641 3,192 4.0%
Growth -5%-2%21%
Woven3,352 3,541 3,933 5,436 17.5%
Growth 6%11%38%
Total6,189 6,243 6,574 8,628 11.7%
Growth 0.9%5.3%31.2%
Source: Arvind Mills

Denim: The black sheep?
While the US accounting for 59% of the global denim demand and Asia accounting for 74% of the global denim supply, a slowdown in the former's economic growth and an oversupply in the latter's capacity has made matters worse for the denim players including the likes of Raymond and Arvind Mills. These companies, however, believe that the denim realisations have bottomed out in FY07 and introduction of premium denim products (in joint venture with foreign brands) will help them. Also, the US retailers, after having outsourced a substantial portion of their sourcing to low cost offshore bases, are now finding it difficult to manage the disaggregated supply-chain. Increasingly, they are looking at consolidating their vendor base in favour of vendors with large scale, proven delivery capabilities, own design capabilities, and low lead-time supply capabilities.

Chinese textile sector
US$ bn 2001 2006 Change (%)
Capex 45 77 71.1%
Production 105 296 181.9%
Export 54 147 172.2%
Pre tax profits 3 11 266.7%
Source: Arvind Mills
What to expect?
Rise in cotton prices, higher labour costs and forex volatility is not expected to leave much headroom for the Indian textile companies to expand their margins in the near future. Expansion at a faster clip coupled with aggressive pricing for exports in the Chinese textile sector (the largest supplier in the world) will only put their patience to test. The same, however, should not sound the alarm bells for the domestic companies that have focused on value addition, entered into long term forex contracts and are capitalising on the low penetration of organized apparel retailing in the domestic economy.

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