Outlook for Indian synthetic textiles stable – Fitch
Fitch Ratings says that the outlook for the Indian cotton textiles is negative to stable in 2012, while the outlook for the Indian synthetic textiles is stable.
Margin pressure persists for both cotton and synthetic textiles driven by rising wage costs and power costs (including shortage of power), and higher interest rates. Cotton textiles are also facing challenges of a slower demand pick-up and a loss of margins; however, recovery is expected from the falling cotton prices, subject to any further volatility in input costs or forex movements.
Synthetic textiles benefit from higher demand for blended textiles, although margins can turn volatile in sync with crude oil price volatility.
Weak demand for cotton and cotton products in YTD FY12 was mainly a result of existing inventories causing mills to postpone any further buying in the backdrop of uncertainty in overseas demand for textiles. Weak demand, labour and power shortage in textiles centres such as Bhiwandi and Tirupur have lead to about 50% of underused capacities.
Instead of adding capacity in India, garment manufacturers are looking at options of setting up capacity or outsourcing job work to Bangladesh to benefit from the lower cost of production.
Cash losses for cotton yarn manufacturers and lower-end fabric companies in H112 impaired their debt repayment capacity leading to several instances of over-utilisation of working capital limits.
Some Fitch-rated textile companies defaulted in YTD FY12 due to an inability to obtain a timely increase of working capital facilities, as banks tightened lending criteria for the sector. Refinancing risks would increase for distressed textile companies in 2012 as the Reserve Bank of India and the Finance Ministry have rejected the proposal for restructuring of textile loans.
FY12 financial leverage will deteriorate for most textile companies due to their higher working-capital debt and lower EBITDA compared with previous year's; and deleveraging will remain a challenge for the sector in 2012.
Given the challenging operating environment led by the uncertainty over demand growth, volatility in raw-material prices and persistent increases in other operating costs coupled with the stress on liquidity, it is unlikely that the sector's outlook will turn positive. However, if falling cotton prices translate into a revival of demand and capacity utilisation, the outlook on cotton textiles could turn stable in the last two quarters of 2012.
The outlook on the synthetic textiles may be revised to Negative if raw-material prices increase substantially, making synthetic textiles less competitive than cotton. Downside risks to the outlook also include the adverse impact of policy changes and a prolonged demand slowdown.
Fitch-rated Indian textile companies include Rupa & Company Limited ('Fitch A-(ind)'/Stable), Balkrishna Synthetics Limited ('Fitch BBB-(ind)'/Negative), Ginni Filaments Limited ('Fitch B+(ind)'/Stable) and Eastman Exports Global Clothing Private Limited ('Fitch A-(ind)'/Stable).