Indian textile: The next leap - Views on News from Equitymaster

Helping You Build Wealth With Honest Research
Since 1996. Try Now

  • MyStocks

MEMBER'S LOGINX

     
Login Failure
   
     
   
     
 
 
 
(Please do not use this option on a public machine)
 
     
 
 
 
  Sign Up | Forgot Password?  

Indian textile: The next leap

Dec 27, 2004

In just few days from now, the textile sector is likely to enter a new phase. The quota-based restriction for textile exports with the US and Europe could be removed. In the existing quota system, Indian textile sector has not been able to realise its full potential on the exports front. But now, we will see Indian textile sector moving towards achieving its export target of US$ 50 bn by the year 2010. We take a look at the current standing of the textile sector on the exports front and what lies ahead?Earlier, the US and European economies restricted imports of textile products from different countries through a measure called MFA (Multi-Fiber Agreement). India, under MFA, received a market quota of 2% and 3% in the US and Europe respectively (i.e. if the US textile import is US$ 100 m, India can service US$ 2 m). However, in 1995, a new agreement, Agreement on Textile and Clothing (ATC) was signed. This was aimed at phasing out the MFA over a decade. Thus, in effect, on December 31, 2004, the quota regime would come to an end. This is of particular benefit to developing nations like India, which has a big textile industry set up.

Textiles is a very important sector for the Indian economy. It is the second largest in terms of direct employment (about 35 m people). Besides, it has a very important role to play at the country’s macro economic level. Just to put things in perspective, the sector contributes to almost 14% of the industrial production and about 35% of the gross export earnings in trade. The sector’s contribution to the GDP stands at over 6%. Due to all of the above, the growth of the industry has a bearing on the development of the economy, especially exports. The following table shows India’s exports in different product category.

India: Textile Exports
(US$ m)Target FY04FY04*% targetFY03*
Textiles13,62510,49977.1%9,712
- Readymade Garments6,2504,94779.1%4,746
- Cotton Textiles4,7753,10765.1%3,034
- Man-made Textiles1,7501,63493.4%1,270
- Woolen Textiles500328.765.7%250.6
- Silk350482.8137.9%411.6
Handicrafts2,6851,20044.7%1,430
- Other and Carpets2,35091939.1%1,190
- Jute8569.181.3%173.7
- Coir250211.684.6%66.5
Total (Textiles+ Handicrafts)16,31011,69971.7%11,142
Source: Ministry of Textiles

Indian textiles is integrated in nature i.e. the industry not only grows its own raw materials (cotton, jute, silk and wool) but also processes the same into high value products like fabrics and garments. Despite quota restrictions, Indian textile exports have grown at a CAGR of over 17% in the period FY93 to FY02. Our main competitors in the textile sector include countries like China, Bangladesh, Indonesia, Sri Lanka and Pakistan. Like India, these countries too are cost-effective producers due to the advantage of lower labour costs, which account for a significant portion of the cost of converting fabrics into garments. The major markets for India have been the US and the EU.

Let’s look at the cost comparisons of various countries.

(% of total cost)BrazilChinaIndiaItalyKoreaTurkeyUSA
Packing1%1%1%0%1%1%0%
Labour5%4%6%30%20%7%25%
Power6%14%15%28%10%12%27%
Auxiliary13%12%14%7%14%10%7%
Capital49%49%36%21%33%37%23%
Raw Material26%20%28%14%22%33%18%
Total100%100%100%100%100%100%100%
Index 52 48 56 100 52 60 87
Source: Ministry of Textiles

From the above table we can comprehend that the biggest advantage that India has over western countries is labour, while when one compares it with China, the biggest advantage we have is the capital cost. From the last row of the above table, we can see that the total production cost of Indian textile product is about 56% of that of Italy (i.e. 56 upon 100) and about 64% (56 upon 87) of that of the US.

The implications of quota removal will be tremendous. For India, the phase out of the quota regime by 2005 would boost the fortunes of the domestic textile industry. One big advantage for India, in fact the whole of Asia, would be from outsourcing. Post-2005, manufacturers in the US and EU will look at lowering costs by outsourcing garments from countries like India. Currently, Asia contributes to over 1/3rd of total US textile imports.

Indian companies have readied themselves for the new quota regime and expanded their capacities to that extent. Arvind Mills for example, is planning to expand its denim capacity to 140 million meters (mm), while Raymond will expand its denim capacity to 30 m meters in FY05 compared to just 10 m meters two years back.

Thus, to conclude, post 2005, there lies a tremendous opportunity for Indian textile manufacturers, as the markets will no longer be restricted. At the same time, it has to be remembered that there could be a huge influx of imports. Though the larger players in the industry are well placed to compete with the multinationals, it is the smaller players (SSI) that will be facing immense pressure. However, smaller players who have access to FDI may benefit on a smaller scale by differentiating their products and catering to niche segment. We believe that the positive impact of new rules will bring in competitiveness and productivity in textile sector in India which otherwise has been marred by inefficiencies.

Equitymaster requests your view! Post a comment on "Indian textile: The next leap". Click here!

  

More Views on News

SUTLEJ TEXTILES 2020-21 Annual Report Analysis (Annual Result Update)

Nov 18, 2021 | Updated on Nov 18, 2021

Here's an analysis of the annual report of SUTLEJ TEXTILES for 2020-21. It includes a full income statement, balance sheet and cash flow analysis of SUTLEJ TEXTILES. Also includes updates on the valuation of SUTLEJ TEXTILES.

SIYARAM SILK 2020-21 Annual Report Analysis (Annual Result Update)

Nov 15, 2021 | Updated on Nov 15, 2021

Here's an analysis of the annual report of SIYARAM SILK for 2020-21. It includes a full income statement, balance sheet and cash flow analysis of SIYARAM SILK. Also includes updates on the valuation of SIYARAM SILK.

TRIDENT Announces Quarterly Results (2QFY22); Net Profit Up 122.9% (Quarterly Result Update)

Oct 26, 2021 | Updated on Oct 26, 2021

For the quarter ended September 2021, TRIDENT has posted a net profit of Rs 2 bn (up 122.9% YoY). Sales on the other hand came in at Rs 17 bn (up 44.1% YoY). Read on for a complete analysis of TRIDENT's quarterly results.

ALOK INDUSTRIES Announces Quarterly Results (2QFY22); Net Profit Down 101.7% (Quarterly Result Update)

Oct 20, 2021 | Updated on Oct 20, 2021

For the quarter ended September 2021, ALOK INDUSTRIES has posted a net profit of Rs 839 m (down 101.7% YoY). Sales on the other hand came in at Rs 19 bn (up 134.2% YoY). Read on for a complete analysis of ALOK INDUSTRIES's quarterly results.

Raymond Shares Gain 5% on this Unexpected Move (Views On News)

Sep 28, 2021

Raymond to rejig business to create value for shareholders.

More Views on News

Most Popular

Infosys vs TCS: Which is Better? (Views On News)

Nov 26, 2021

In the post pandemic era, the top two IT companies in India are fighting to capture the growing demand for IT.

This Multibagger Stock Zooms 20% After Dolly Khanna Buys Stake (Views On News)

Nov 24, 2021

Shares of this edible oil company zoomed over 50% in three days after ace investor bought around 1% stake.

How to Hit Rs 100 Crore Wealth in Your Lifetime (Equitymaster Wealth)

Nov 15, 2021

This is how you can achieve the ambitious goal of a net worth of Rs 100 crore.

Don't Sell these Stocks if the Market Falls (Profit Hunter)

Nov 17, 2021

These are the 3 types of stocks that you should not sell in a market crash.

MobiKwik IPO Opens for Subscription Soon. Key Things to Know Before Subscribing. (Views On News)

Nov 20, 2021

The Rs 19 bn issue is set to hit the market soon.

More

Become A Smarter Investor
In Just 5 Minutes

Multibagger Stock Guide 2022
Get our special report Multibagger Stocks Guide (2022 Edition) Now!
We will never sell or rent your email id.
Please read our Terms

5-YR ANALYSIS

COMPARE COMPANY

MARKET STATS