Home / Knowledge / News / Fashion / Denim sector could face fall in credit profile: Report
Denim sector could face fall in credit profile: Report
19
May '17
The denim industry, representing below 10 per cent of the textile market, is likely to face deterioration in credit profile in the absence of improvements in realisations in FY18, says a recent report. Its operating margins could fall to 10-11 per cent in FY18 due to cost inflation amid surplus capacity in denim standard products with low cotton content.

India Ratings and Research (Ind-Ra) has estimated prices to moderate in 2HFY18, highlighted in the report ‘Stable Input Prices, Fiscal Incentives to Support Textile and Cotton in FY18’. However, the denim surplus situation and inventory losses are likely to pressurise margins.

Moreover, the man-made industry demands a level playing field for the taxation of cotton, which is exempt from indirect taxation. If cotton is brought under the Goods and Services Tax (GST) then cotton fabrics including denim sector’s profitability may come under pressure in the transitory period.

The agencies denim peer set average EBITDA margins deteriorated in 9MFY17 to 12.6 per cent from FY16’s 13.2 per cent. The fall in margins is on account of players’ inability to completely pass on the increase in cotton prices, on the back of high competitive pressure, similar to the situation in FY14.

Raw cotton prices have increased by 32.8 per cent YoY in March 2017 and Ind-Ra expects it to remain elevated until 1HFY18. For Denim manufacturers’ cotton forms more than 35-40 per cent of the total raw material requirement. The agency notes that for many of the basic denim fabric manufacturers catering to domestic consumption average realisations remained steady, despite higher cotton prices in 9MFY17.

However, some of them have been able to increase realisations for 4QFY17 partly passing the cost inflation with a lag. Denim garments players are likely to perform better than fabric players, as the retail margins may sustain as fabric prices remain under pressure.

Ind-Ra expects the denim sector to post robust volume growth of over 10-15 per cent in line with the past trend along with rising disposable incomes, rapid growth of the retail sector, westernisation trend, young population demographics, and versatility of denim as a fabric. However, Ind-Ra views that the capacity addition is growing at a faster rate. Moreover, the existing capacities will face competition from new-age cost efficient plants.

The denim fabric industry is cyclical in nature and is characterised by periods of excess capacity followed by narrowing the demand-supply gap. The apparent short project pay-back has encouraged a number of denim fabric manufacturers to put up additional capacity, higher than the estimated demand growth. Further capacity additions are likely to keep the domestic competitive pressures heightened. As per CMIE data, a moderate level of new capacity ramp-up is underway in FY18. This includes capital expenditure for expansion and backward integration by a few companies namely, Nandan Denim Limited, Raymond Uco Denim Pvt Limited and RSWM Limited.

Overall, the credit profile for most players has come under pressure also due to the stretched working capital cycle and debt-led capacity expansion in the backdrop of operating margin pressure. Aggregate peer set net leverage (Net Debt/EBITDA) increased to 4.59x in 1HFY17 compared to 2.83x in FY16. The working capital cycle has got stretched to 61 days in 1HFY17compared to 54 days in FY16, on account of the high credit period and inventory holding for the new capacity ramp-up. Increased competition in the international arena and higher receivable days will impact the exports profitability.

However, Ind-Ra believes the credit profile of value-add export-oriented manufacturers will remain robust. Industry players with diversified revenue lines with a mix of man-made textile products are better placed than the pure denim players. Also, companies with strong liquidity, low leverage and short working capital cycle are better placed to face the challenging times. (KD)

Fibre2Fashion News Desk – India


Must ReadView All

Courtesy: Pexels

Textiles | On 19th Sep 2018

Punitive PRC tariffs on US goods has extra 5% on textiles

Responding to Washington’s latest duty increase in a dispute with...

Courtesy: Tecnorama

Textiles | On 19th Sep 2018

'Reliability & excellent quality are Tecnorama’s USP'

The complete reliability and excellent quality of Tecnorama systems...

Courtesy:  Stanislav Kondratiev on Unsplash

Apparel/Garments | On 19th Sep 2018

AAFA questions US tariffs on $200 bn Chinese goods

The American Apparel & Footwear Association (AAFA) has questioned...

Interviews View All

Dharmendra Shah, Ozone PB Spintex Limited

Dharmendra Shah
Ozone PB Spintex Limited

‘We have made huge investments to ensure quality yarn production.’

Rashi Menda, Zapyle

Rashi Menda
Zapyle

Every fifth sale we make on Zapyle is a repeat purchase

Riddhika Shah, SS Homme

Riddhika Shah
SS Homme

'Worsted wool is the ideal fabric for menswear'

Abhishek Pachauri,

Abhishek Pachauri

Reckon Industries adapts latest systems for manufacturing from designing...

Italtex,

Italtex

Italtex is a leading studio publishing fabric trend-books since 1959....

Hardik Sanghvi,

Hardik Sanghvi

Idealin Fogging Systems has been engaged in designing and manufacturing...

Mr Ambrose Chan, DSG International (Thailand) PLC

Mr Ambrose Chan
DSG International (Thailand) PLC

Pierre Wiertz, EDANA

Pierre Wiertz
EDANA

EDANA, the international association serving the nonwovens and related...

Silke Brand-Kirsch, Schlegel und Partner

Silke Brand-Kirsch
Schlegel und Partner

Silke Brand-Kirsch, executive partner of Schlegel und Partner, a leading...

Rupa Sood and Sharan Apparao, Nayaab

Rupa Sood and Sharan Apparao
Nayaab

Nayaab, an exhibition meant to celebrate Indian weaves, is in its second...

Akta Adani, India Boulevard

Akta Adani
India Boulevard

India Boulevard is a San Francisco-based curated fashion marketplace that...

Vaanee Bhatia, Gritstones Clothing

Vaanee Bhatia
Gritstones Clothing

<div>Delhi-based Gritstones Clothing offers quality and exemplary style...

Press Release

Press Release

Letter to Editor

Letter to Editor

RSS Feed

RSS Feed

Submit your press release on


editorial@fibre2fashion.com

Letter To Editor






(Max. 8000 char.)

Search Companies





SEARCH

Leave your Comments


September 2018

Subscribe today and get the latest update on Textiles, Fashion, Apparel and so on.

news category


Related Categories:

Advanced Search