Pent-up Demand Supports Textile & Apparel Recovery In 2QFY20-21: Ind-Ra

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Pent-up Demand Supports Textile & Apparel Recovery In 2QFY20-21: Ind-Ra

Indian textile companies have significantly increased their plant capacity use in August 2020 with the easing of lockdown restrictions. The increase in demand in domestic and overseas markets will lead to recovery in textile and apparel industry during the second quarter (2Q) of FY20-21, according to a report by India Ratings and Research (Ind-Ra). In the report, the ratings agency says, "We expect both the segments' volumes to have corrected to 50%-80% in August 2020 and reach 70%-80% of normal over September 2020, led by pent-up demand and strong export order build up in all the segments. Both man-made fibres and cotton segments should start benefitting from the low raw material prices in 3QFY21. We expect raw material prices to remain moderate in 2HFY21." Ind-Ra says it will continue monitoring the domestic demand recovery along with export markets in the US, Europe and China which are the major hubs for Indian textiles products. According to the ratings agency, textile players' weak profitability over the first half (H1) of FY20-21, along with supply chain disruptions, has impacted cash flows; while the moratorium announced by the Reserve Bank of India (RBI) under the Covid-19 relief package has provided the inevitable liquidity support. However, the lifting of moratorium from 1 September 2020 without the full recovery in cash flows would require additional caution and monitoring of cash flows, it added. Ind-Ra says, "Some of such stressed issuers, mostly in the sub-investment grade rating category, may opt for the RBI announced one-time loan restructuring to survive the imminent liquidity challenges. We expect textiles players to record 15%-35% decline (year-on-year- y-o-y) in their top line and 20%-50% yoy drop in operating profits over FY20-21." Textile prices showed some recovery During August 2020, prices of textile products have recovered broadly from the lows of April-May 2020. International cotton prices (US) continued to recover in August 2020 by 4% month-on-month (mom), after dipping in April 2020. Indian cotton prices increased about 5% m-o-m in August last week, following a partial correction in the international prices over July 2020. Cotton arrival is almost complete in the current season while Cotton Corporation of India (CCI) continues to procure to support cotton prices. According to the ratings agency, plant utilisation of pure man-made fibres and yarn manufacturers was severely impacted over 1QFY20-21 amid the Covid-19-led lockdown. However, it says, volume recovery of pure man-made fibres and yarn should be quick but has started relatively late from August 2020, while the cotton and blended spinners' volumes have started recovering from June 2020. Fibre and yarn prices have been steady in August 2020, while discounts are also offered in few segments to boost sales. Cotton yarn and blended yarn prices largely remained flat in August 2020, despite demand recovery as the supplies also increased steadily. Moreover, margins of large spinners could remain under pressure as their cotton season procurement was at about 10% higher prices and operating utilisations are still below optimum levels. Ind-Ra says it expects fabric and apparel prices to have declined in August 2020, led by a quick supply restoration than demand recovery. During July-August 2020, most players have resorted to discounts to boost sales and also generated the much-required internal liquidity. Disbursement of Covid-19 bank loans and promoter-led infusions also supported liquidity and the ability of fabric and apparel players to ramp up operations quickly in these segments. Ind-Ra expects apparel prices to remain modest in 2HFY20-21 to push sales. Apparel exports pick up Readymade garments exports recovered significantly starting June-July 2020, the ratings agency says, adding, that order book build up in August 2020 was strong, supported by restocking at global retailers and global sector consolidation. "Large Indian players are benefitting from the shift in market share to India from China. Large apparel and readymade garment manufacturers have largely been able to resolve labour mobility and availability concerns," it added. According to Ind-Ra, demand for home textiles has been only moderately impacted as they are necessary products for day-to-day life. However, it says, US-China trade war has impacted imports from China into the US, thus giving a strong push to exports from India. "We expect the demand for home textile exports to sustain in 2HFY21 at healthy levels achieved over August-September 2020. We also expect Indian players to increase their already strong market share in terry towels and bed linens, led by supply chain diversification away from China," the ratings agency concludes.