Crisil Flags High Input Prices, Slowing Demand As Worry For Home Textile Firms

Even as India looks at an ambitious $100 billion dollars in textile exports by 2030, slowing exports, rising cost in the wake of geopolitical tensions could dampen profitability of home textile companies.

Lower export demand and a sharp increase in raw material and transportation costs can moderate the operating profitability of home textile makers by 150-200 basis points (bps) to 13 per cent this fiscal, warns a Crisil Ratings study.

Exports account for 60-70 per cent of the revenues of the Indian home textile industry with the US, the world’s largest market for it, contributing a a sizeable 58 per cent of these exports. This is a major challenge since inflationary headwinds have led to big-box retailers pruning inventory and consumers cutting down on discretionary spends which is expected to impact India’s global demand for home textiles in the near-term.

Already a slowdown in the sales of key US retailers in the past 3-6 months has led to an on-year decline of 5-6 per cent in overall home textile exports from India between January and April 2022, an analysis of 60 companies accounting for over 60 per cent of the sector revenue by CRISIL Ratings shows.

Slowing exports growth and high cotton prices will hit the operating margins of home textile exporters by 150-200 bps this fiscal,” cautions Mohit Makhija, Senior Director, CRISIL Ratings.

Adding to these issues is the price of raw cotton, a key input in textiles. Supply-chain disruptions, exacerbated by the Russia-Ukraine crisis have led to a volatility in ocean freight rates which will also impact of the profitability of the textile sector already reeling from the impact of these disruptions.

Soaring domestic cotton prices have gone past international levels as a result of which exports have become less competitive. Consequently, India’s share in the US import basket moderated 700 bps in the four months ended April 2022, on-year, finds the Crisil study.

As the way ahead, India is betting big on the strength of the apparel segment of the textile industry with rigorous efforts to promote the Indian brand at various global platforms like the recent sixty-seventh India International Garment Fair organised by the Apparel Export Promotion Council.

Commerce Minister Piyush Goyal has set a target to double the production and triple the exports of the apparel sector which is supported by government efforts through cheaper credit, loan in foreign currency, building the cluster for infra development, RoDTEP and ROSL for tax reimbursement.

Part of its strategy are platforms like IIGF which in June 2022, brought together 1189 international buyers from 59 countries and showcased the latest garment and fashion accessories trends and products of micro, small and medium enterprises.

The order booking process has also started with buyers from geographies as diverse as the USA, Brazil, Japan, UK, Spain, Australia, Poland, Colombia, Greece, Italy, Egypt, Chile, Argentina, UAE, Thailand, France, Germany, Canada and Iran.

Naren Goenka, Chairman AEPC expects a growth of 10 per cent over the $166.17 million business generated in the last physical fair held in January 2020 despite adverse marketing conditions prevailing in various countries.

India has reasons to be optimistic on the apparel sector, according to Goenka, with the global apparel market which was just under $1.5 trillion in 2013 expected to generate revenues to the tune of $1.8 trillion in 2022 and $1.9 trillion in 2025 before it closes to $2 trillion in 2026.

“India offers to the world a complete value chain solution from farm to fashion giving us a competitive edge by shortened lead times to reach our buyers,” says Goenka.

The government is also working to empower MSMEs and boost their contribution to the textile sector output and exports. This industry sector contributes 95 per cent of the total 1200 exporting units in Tiruppur, contributing Rs 33,000 crore exports during FY 2021-22.

The government is mulling creating around 75 cluster of similar nature as Tiruppur in potential districts across India with the support from industries in Tiruppur.

While the idea is workable, industry leaders have flagged the need for faster cross boarder movement of cargo for helping Indian exporters in joining global value chain, announcement of new Technology Upgradation Fund Scheme (TUFS) scheme, a Production Linked Incentive Scheme (PLI-2) for the apparel sector and suitable calibration of export of cotton and cotton yarn to ensure that these are available to the exporting units at competitive prices.

The upside of the India textile industry scenario, as per Crisil Ratings is that the credit outlook for the sector will remain stable supported by balance sheets, strengthened by healthy cash accrual and debt reduction over the past two fiscals.

Makhija believes the rupee’s depreciation against the dollar and sustenance of the China+1 policy by global buyers will cushion the hit on profitability to some extent. The second half of this fiscal should gradually restore demand momentum and market share for Indian home textile exporters as freight and raw cotton costs moderate, and ease pressure on profitability.”

While all this will be beneficial, the textile industry has called for immediate measures to control cotton yarn prices which has increased to an extent of 125 per cent in the past 18 month. An intermittent ban on cotton exports for a few months will ensure availability to the industry as an immediate measure, say stakeholders.

This is important as India is already losing out to its competitors in Bangladesh, due to their FTA and GSP benefits in most of the prominent export markets. Bangladesh is already 2.9 times ahead of India in garment exports.

India is not lagging behind in this respect and moving ahead on FTA with Canada, EU, UK. Australia. Even GCC and Israel along with Eurasia and Brazil have shown their interest to forge FTA with India. I am hopeful that by Diwali, India-UK FTA will be concluded,” the Commerce Minister has assured the industry.

Another response is already in place with formation of a Textiles Advisory Group which will look at the issues linked to productivity be it good quality seeds, introducing the new varieties, crop insurance to farmers and use of technology in farm optimisation and produce management.

Also Read: Union Govt Wants To Create 75 Textile Hubs Like Tiruppur: Piyush Goyal