Stable outlook rating for 88% of cotton textile mills

Credit profiles of companies going for large debt-funded capex will remain subdued in 2013 given the input price risks and high borrowing costs. Completed capex resulting in scale benefits would lead to margin expansion. More policy measures are required to revive liquidity and growth in the backdrop of challenging textile industry operating environment since 2008.

To boost investments in the spinning segment, the Gujarat Government in September 2012 came up with The Gujarat Textile Policy (GTP) targeting installation of 2.5m spindles worth INR70bn over the next five years. RBI also extended the 2% interest subvention for exporters till 2014, which will aid liquidity.

An additional 2% incentive is provided by the government for entities registering higher yoy exports. Other measures in the pipeline such as talks with Europe for zero import duty on Indian imports into EU could provide level playing field with countries such as Bangladesh in the long run. 

The government has allocated INR115.7bn for the TUFS scheme in the Twelfth Five Year Plan period (2012-2017). This is likely to encourage investments in the sector, especially in the areas of modernization, spinning and processing capabilities as well as for entering new markets/products. 

2012 Review

Stabile Margins:  2012 was marked by stability and restoration of operating margins for textile players across the value chain led by steady cotton prices, and the consequent positive impact on liquidity. Margins have been stable-to-improving, led by a better product mix, commanding higher margins in the case of Eastman Exports Global Clothing Private Limited (‘IND A-’/Stable). 

Flat Revenues:  Demand remained sluggish across the value chain in 2012. For apparel exporters, order sizes reduced, hence volumes fell. However, rupee realizations increased partially due to rupee depreciation against the USD and Euro which resulted in moderate Low Capex: Investment activity slowed down across the textile value chain in 2012 due to uncertain demand and volatile raw material prices which led to tying up of funds in inventories.  

Mid-Year Outlook Revision: The Outlook for synthetic textile companies was revised to negative from stable in August 2012 as crude-based raw material prices have increased on account of rupee depreciation (for further details, please refer 2012 Mid-Year Outlook: Indian Textiles report, dated 2 August 2012, available on www.indiaratings.co.in). Lower cotton prices and sluggish demand have reduced the substitution demand of synthetic fibers/textiles. 

Rating Actions:  In 2012, India Ratings affirmed 20 textile companies, downgraded seven, upgraded two, and revised the Outlooks of two companies to Negative from Stable and of one company to Positive from Stable. Gayatri Suiting’s, a manufacturer of synthetic fiber and textiles, was downgraded to ‘IND D’ from ‘IND BB-’ on account of term loan defaults due to its stretched liquidity.

The Outlook on Navnitlal Private Limited was revised to Negative from Stable, led by weakened interest coverage and deteriorating credit metrics due to raw material price volatility and slowing demand. Rupa & Company was upgraded from ‘IND A-’ to ‘IND A’, driven by improvement in financial profile emanating from a superior product mix.

Indian Ratings