India Ratings and Research (Ind-Ra) has published the March 2020 edition of its credit news digest on India's textile sector. The report highlights the trends in the sub-segments of the textile sector, including cotton, man-made fibres, yarns, fabric with a focus on commodity prices, imports/exports, production and recent rating actions. The continued lockdown in April 2020 (from late March) has impacted the entire textile industry and disrupted exports. Ind-Ra expects the export demand to be weak until 1HFY21, till the economic recovery of the United States and Europe, which are the major hubs for Indian products. Furthermore, the domestic demand as a discretionary product is expected to pick up gradually in 2QFY21, but will be lower than a normal year demand. For FY21, the agency expects the textile players to record a substantial fall in their top line and operating profits. Raw Material Cotton prices continue their downward trend amid a declining demand and the spread of coronavirus, leading to lower consumption and thus disruptions in the global supply chain. They fell by 2.3% mom and 11.3% yoy in March 2020, on account of reduced offtake by mill owners which are facing the heat of production disruption and excess inventory amid the spread of coronavirus. However, Cotton Corporation of India continues to hold up the stock (30% of total arrivals) and may support the current prices over the short term. The agency expects the prices in FY21 to correct by 5%-10% yoy, owing to a sharp fall in international cotton prices amid a reduction in the consumption levels by 6.4% mom for the current season. Spinning The current global lockdown in major economies of the world has also led to a loss in the spinning capacities of three and half weeks or about 16% of the expected global capacities of March. The pandemic situation is impacting the supply chain of the cotton sector. While Chinese cotton mills' spinning fell by up to 90% during the peak of crisis in early March, the recent resumption of spinning and manufacturing activities provides a hope of limiting the impact on the segment for the marketing year. Man-made Fibres With around 50% drop in the global oil prices in March-April 2020, companies in the man-made fibre segments are staring at inventory losses, as there will be limited pricing power in the short run. The working capital cycle may remain stretched with an elongation of receivable cycle and higher inventory volumes. The operating profitability could be impacted by 25%-30% yoy in FY21, due to lower gross margins and negative operating leverage. Moreover, the likely supply shortage of imported purified terephthalic acid for domestic players because of the Covid-19 pandemic would limit the correction in raw material prices. Fabrics Fabrics players witnessed lower production in March 2020, on the back of a lower downstream demand and disruptions on account of the current crisis. During 11MFY20, the production of knitted fabrics fell 1.2% yoy, which is expected to decline substantially in FY21 amid a declining demand and discretionary spending along with a gradual revival of export markets. The fabric industry is dominated by a few players which have strong liquidity to manage the downside caused by the coronavirus, while small and medium-size players would face the brunt of the economic lockdown. Ready-made Garments Manufacturers of apparels and ready-made garments have been grappling with a lower domestic demand and disruptions in the physical supply chain across the globe. Spending on clothing is highly correlated to household incomes; with unemployment in the US rising at unprecedented rates, the agency expects a persistent weak consumer demand to impact downstream production. Global retailers are responding to rapid declines in consumer spending by reducing and cancelling orders for textiles and apparels. The agency expects exports from India to fall by at least a quarter in FY21 for the fourth consecutive year. Home Textiles The home textile industry will also be impacted substantially with almost 80% of revenues coming from the US and Europe markets. While major retailers have deferred orders or cancelled them, the need for innovation and ability to shift to new product lines would be the key monitorables. The industry has witnessed players switching capacities to manufacture medical masks, personal protective equipment, wet wipes, and advanced textile fabrics, to mitigate fixed costs and negate the reduced export demand.
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