Stable outlook rating for 88% of cotton textile mills

Power is an important cost component, particularly for spinning mills and fabric units that are more mechanized than garment units. Besides the element of cost, uninterrupted power supply is also important. Companies with captive power generation facilities are viewed favorably as they are self-sustained and more cost effective. 

Margins indication is more varied and dependent on company-specific strategies (backward integration, production diversification) to mitigate the margin weakness. High interest costs continue to impact net profitability and interest coverage. 

Elongated Working Capital Cycles

Working capital requirements of companies which are backward integrating (Shahi Exports Private Limited; ‘IND A-’/Stable) are expected to increase. Another trend for exporters was increase in inventory days on account of samples for new product lines (Eastman Exporters Global Clothing Private Limited; ‘IND A-’/Stable; FY12: 132 days, FY11: 91 days). Surya Processors Private Limited (‘IND BB-’/Positive) also continued to illustrate lengthy receivables and inventory period.

Tight Liquidity Position

Around 19% of total outstanding India Ratings-rated textile companies are rated in the ‘IND D’ category, mainly on account of liquidity constraints, resulting in debt servicing delays and defaults. Companies are facing liquidity concerns due to delays in bank line enhancements and highly working capital intensive operations. Median interest coverage for textile companies rated in the ‘IND B’ category is less than 2x indicating low cushion against any volatility in earnings. 

Debt Restructuring Scheme Ineffective

The INR350bn textile debt recast plan approved by the Reserve Bank of India (RBI) in 2012 has failed to gain traction as most of the stressed textile companies had already availed restructuring during the 2008-2009 slowdown, and the second round of restructuring would render their loans as non-performing assets (NPA). The NPA tag would deprive them of benefits under The Technology Up gradation Fund Scheme (TUFS) and push up their borrowing costs.

Therefore, the scheme largely remained unutilized and textile companies opted for high-cost bank borrowings to maintain liquidity. The Indian banking system exposure to the textile sector was estimated at INR1, 000bn as on 31 March 2012. Considering weak credit quality and rising proportion of the textile sector in non-performing assets, banks are cautious and stricter in lending norms to this sector.