Home Fashion Textiles: Growth hinges upon reopening of retail space, festive demand and policy...

Textiles: Growth hinges upon reopening of retail space, festive demand and policy support

By  
SHARE

The subdued domestic demand and declining export demand due to lockdowns in the global markets on account of come as a double blow for textile companies. While the domestic demand could revive in 3QFY21 with the onset of the festive season and reopening of retail spaces, export demand would be fairly dependent on the recoup of major economies such as the US and UK. Also, there seems to a short-term opportunity for Indian companies to cater to those markets which were earlier catered by China and Bangladesh. However, the threat of import of lower cost raw materials persists and could hamper the domestic industry in the near term.

Textiles: Growth hinges upon reopening of retail space, festive demand and policy support

These were the findings of India Ratings and Research’s (Ind-Ra) assessment for the impact of COVID-19 on India’s textile sector highlights expected outcomes while presenting Ind-Ra’s revenue base case assumptions as well as sub-sector outlook from raw materials to home along with impact on credit metrics.

The agency expects a huge revenue downfall for textile companies in 1HFY21 and a moderate recovery only over 2HFY22. With the stoppage of production and shortage of labourers due to the , revenue is likely to bottom out over 1HFY21; but, the consumption demand is unlikely to revive in FY21. This is likely to result in a fall in EBITDA in the range of 20 percent -50 percent Y-o-Y, depending on the segments, leading to deterioration in credit metrics. Furthermore, players in spinning, readymade garments carry high debts on account of stretched working capital cycles with low cushion to borrow. The agency expects the working capital cycle to stretch for textile players over the next 9 months due to delays in collections and a longer inventory.

The ongoing economic slowdown is likely to contract the demand by 25 percent to 35 percent Y-o-Y across yarn, fabric and apparels in FY21. The demand over 1HFY21 is likely to be muted with the summers lost because of the lockdown. FY21 demand growth would typically depend on discretionary spending, and thus a gradual recovery in household income over 2HFY21. Ind-Ra assumes normalcy in revenue to return by 2HFY22, on back of reopening of the retail space, a normal monsoon, the festive and wedding season. The demand revival will also depend on government measure to incentivize exports.

The agency expects a correction in cotton prices over 2QFY21 from the levels of Rs 90-95 per kg as of May 2020 due to a low demand and high holding levels at Cotton Corporation of India. However, holding stocks could only provide a short-term relief. Some of the inventory is expected to be exported, given the advantage of lower prices and rupee depreciation.

The textile industry is labour intensive in nature, and with most labourers headed to their hometowns, sector companies could face challenges to operate even at low capacities. The agency expects that it would take 3-4 months for operations to stabilise post Unlock 1.0.

Readymade garments/apparels and cotton yarn exports, which were already facing headwinds prior to the lockdown, is likely to be more impacted than other segments, led by the fragmented nature of industry and a slowdown in Chinese yarn demand. The situation has worsened in the lockdown with consumers delaying discretionary consumption. Amid high competition,
the oversupply in the domestic market is likely to postpone demand normalcy until end-1HFY22. Conversely manmade fibres / synthetic players have the advantage of a lower cost compared to cotton players and therefore could see a better demand, as players look to blend synthetics more in the fabrics/apparels.

Key issues such as supply chain disruptions, incentives and labour unavailability need to be addressed to revive the textile sector. Labour retention policies of each state would be critical to ensure minimum disruption of manpower availability.