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Textiles: Head-on with China...

Aug 4, 2006

Besides population, GDP growth and infrastructure amenities, India today is competing head-on with China on other grounds as well. One of them being - targeting a larger share of the American and European consumers' wallets. With the uncertainty prevailing over the Chinese textile industry on account of the restriction on exports to the US and Europe, retailers and merchandisers in these countries are seeking to diversify their sourcing in order to avoid any sudden supply shocks. India has been one of the major beneficiaries, given its competitiveness in the global textile market.

  May'04 - Apr'05 May'05 - Apr'06 Change %
Total imports US$ bn Mkt share US$ bn Mkt share  
US imports 85.8   89.2   4.0%
India exports 4.0 4.6% 4.9 5.5% 22.5%
China exports 16.9 25.2% 22.5 19.7% 33.1%
US imports 66.6   68.4   2.7%
India exports 2.5 3.7% 3.2 4.7% 28.0%
China exports 10.8 21.6% 14.8 16.2% 37.0%
Non apparels          
US imports 19.2   20.9   8.9%
India exports 1.5 7.8% 1.7 8.2% 13.3%
China exports 6.1 31.7% 7.7 36.7% 26.2%
US imports 0.2   0.1   -33.3%
India exports 0.000 0.3% 0.000 0.2% -34.7%
China exports 0.002 1.3% 0.016 13.6% 597.4%
Terry towels          
US imports 2.5   3.4   36.1%
India exports 0.4 17.8% 0.6 17.5% 34.1%
China exports 0.4 17.7% 1.0 28.0% 115.9%

A share of the pie: US and European markets dominate 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 (5-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.

Although China continued to have the lion's share of the addressable market, India made an appreciable attempt to catch on. Data from the US Ministry of Finance supports this view. After subdued performances in the early months of FY06, India's textile exports to the US grew by a strong 23% YoY, leading to a 90 basis points gain in market share. Terry towel and apparel exports remained the key growth drivers for India, growing at impressive 34% YoY and 28% YoY growth rates respectively in FY06. China's apparel exports, though, continued to clock a higher growth average than those of India. The country lost a significant part of its market share (fell from 22% in FY05 to 16% in FY06). This was partly due to barriers levied on China's exports to the US and partly due to a 5.8% depreciation of the Rupee versus the Renminbi (in the said period), thus improving India's relative export competitiveness. The denim segment, however, despite a small base, proved to be significantly revenue-accretive to China, while India lost its share (due to higher input costs and lesser maneuverability to a change in styles).

Nonetheless, India's overall market share at 5.5% in April 2006 is 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 of exported fabric at US$ 2.1 improved by 3.7% YoY. On the other hand, China's realizations have been under pressure since the beginning of the year.

Risks at the fore
While the progress made by India in the post-quota regime is certainly not negligible, the country should not be resting on it's laurels and ignore some perilous risks to the sector's growth prospects.

    Slowing US economy: The reported 2QCY06 GDP growth rate for the US economy at 2.5% YoY against that clocked in 1QCY06 (5.3% YoY) clearly signals signs of an economic slowdown. Further interest rate hikes will only hold back further expansion. Given the reliance of the domestic textile industry on the US market, it goes without saying that the sustainability of the current growth story needs to be viewed with caution.

    Forex risks: Textiles companies across-the-board, irrespective of their industry status and operational performance, reported a tepid growth in bottomline this quarter, thanks to the losses booked due the volatility in their forex transactions. These companies, which had enjoyed profits in the last fiscal, with the appreciating rupee (against dollar), have had to now book mark-to-market (MTM) losses because of short forward cover on the steadily depreciating rupee.

Our outlook for textile companies remains divided between the industry leaders and the 'me-too' companies. While those having state-of-the-art manufacturing facilities, high capacities, a diversified revenue base, established brands and relationships with global players remain our top picks, we believe that companies that have taken optimum advantage of the domestic dynamics (e.g. borrowings through the TUF scheme offering interest subsidy of 6%) and are best hedged against forex fluctuations are also well-geared to withstand any storm. For the rest, the future lies uncertain!

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