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Textile: Is it different this time?

Sep 15, 2006

Indian textile companies, across product categories (apparels, denim, home textiles) are today seeking to build scale, extend their footprint and access global markets. While their attempts are not without several hiccups, there is certainly a sort of rejuvenation in the sector, which was once written off as an old economy debt-ridden sector. This was primarily so when most companies in the sector sought refuge in the BIFR in the late 90s. With the textile majors today once again talking of expanded capacities and inorganic growth, we analyse whether the scenario is different this time. The pros...
Yet to reap the fruits of capex: 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) - due to expire in March 2007. This led to the capex-spending phase in the textile sector peaking in the last two fiscals. Against this backdrop, we believe most of the capex in the sector has already been incurred or is in the last leg of completion. We believe that the benefits of these expansions should start filtering in from FY08 onwards, once the new capacities stabilise and the utilisation levels get normalised.

Overseas alliances to help move up the chain: 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. The strategic rationale for the alliances could be as outlined below.

  • Branding and retailing capabilities: While Indian textile companies have the advantage of a cost competitive manufacturing base, they lack global branding and retailing capabilities. Tying up with overseas companies will help them move up the value chain and focus on the more lucrative branding and retailing business (Welspun India's stake acquisition in Christy).

  • Market access: Overseas alliances give Indian companies direct access to the US and European markets where their overseas partners have a distribution channel in place (Raymond's JVs with overseas partners).

  • Technology transfer: Transfer of technology and know-how for manufacturing the premium end products will become a possibility. Raymond through its JV with Gruppo Zambaiti has entered into a new line of business - high-value cotton shirting fabric. While Raymond will provide the low-cost manufacturing base in India, while its overseas JV partner will supply the technological know-how.

  • Designing capability: Overseas alliances will help Indian companies acquire international design capabilities and product development skills. This is true for all the three JVs entered into by Raymond in the recent past.

Overseas alliances
Indian company Overseas entity Profile of overseas entity Nature of alliance
Raymond UCO NV, Belgium Market leader in high-end denim in Europe JV (50:50)
Gruppo Zambaiti, Italy Amongst Italy's top 3 high fashion cotton textile companies JV (50:50)
Lanificio Fedora, Italy Largest producer of carded wollen fabrics in the world JV (50:50)
Arvind Mills VF Corporation, US VF Corp owns popular denim and apparel brands including
Lee, Wrangler, Vanity Fair, Nautica, JanSports and Kipling
JV (40% stake of Arvind)
Welspun India Christy, UK UK's largest towel brand Acquisition (85% stake)
Alok Industries Teviz, Portugal Manufacturer of high end shirting fabric JV
Source: Company, Equitymaster research

Retail footprint: 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 (see table below). These include companies like Welspun and Himatsingka, which were traditionally export-oriented, as also Raymond, which has been the pioneer in domestic textile retailing. While Raymond has been reasonably successful with most of its domestic brands, its brand Color Plus is pegged as the most profitable apparel brand. Home textile (furnishing) companies like Himatsingka and Welspun have also taken steps in this direction with their outlets Atmosphere and Spaces respectively.

Seeking global footprint
Company Product category Brands No. of stores Owned Franchised
Raymond Apparel Raymond, Park Avenue, Parx, Manzoni 395 52 343
Worsted suiting Color Plus, Zapp
Welspun India Home furnishings Spaces, Home Mart 46 23 23
Himatsingka Seide Home furnishings Atmosphere 11 11 0
Arvind Mills Apparel Tommy Hilfiger, Arrow, Lee, Wrangler, 211 NA NA
Flying Machine, Excalibur, Newport
NA - Not available

And the cons...
Home textiles-Over-supply concerns: 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.

Apparel-Rigid labor laws: 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.

Denim-Excess capacity: Total denim capacity in India has nearly doubled over the past 12 to 15 months, 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 nearly 15% drop in prices within a few months.

Firming cotton prices: As per the data for cotton production shown by the textile ministry of respective countries, cotton production is expected to rise by 2% globally. However, the new capacities in the textile industry seem to have to be falling short of sufficient raw material. While India continues to remain in surplus, the demand for cotton from across the globe is expected to keep cotton prices firm for the rest of the fiscal, thus impacting the operating margins of textile companies.

Cotton demand supply scenario
Production (m bales) Closing stock (m bales)
FY06 FY07E Change FY06 FY07E Change
World 114 116 1.8% 52 48 -7.7%
US 24 20 -16.7% 6 5 -16.7%
India 19 21 10.5% 9 10 11.1%
China 26 28 7.7% 13 11 -15.4%
Pakistan 10 11 10.0% 3 3 0.0%
Source: Office of Textile Commissioner and OTEXA

The scenario is...
...no different this time! Excess capacity, pressure on realisations and raw material costs are as much of a concern today as it was half a decade back. In fact, dependence on exports for vending a large part of turnover has cost the companies foreign exchange losses (in their hedging account) with the rupee depreciation. Nonetheless, what needs to be acknowledged is that several companies in the sector have been pro-active in taking advantage of the regulatory and market opportunities (TUF, retail outlets, overseas JVs), which we believe will stand them in good stead in times to come.

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