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20-50% YoY profit drop for Indian textile firms in FY21

16
Sep '20
Pic: Shutterstock
Pic: Shutterstock
Indian textile companies have significantly increased their plant capacity use in August this year with the easing of lockdown restrictions, according to India Ratings and Research (Ind-Ra), which expects textile players to record 15-35 per cent year on year (YoY) decline in their top line and 20-50 per cent YoY drop in operating profits over fiscal 2020-21.

Ind-Ra recently published the August 2020 edition of its credit news digest on India’s textile sector.

Textile players’ weak profitability over the first half of this fiscal along with supply chain disruptions has affected 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 September 1 without the full recovery in cash flows would require additional caution and monitoring of cash flows, Ind-Ra said.

Some of such stressed issuers, mostly in the sub-investment grade rating category, may opt for the one-time loan restructuring announced by RBI to survive the imminent liquidity challenges, the organization said.

The prices of textile products have recovered broadly in August 2020 from the lows of April-May 2020. International cotton prices (US) continued to recover in August 2020 by 4 per cent month over month (MoM), after dipping in April 2020.

Indian cotton prices increased by about 5 per cent MoM 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 the Cotton Corporation of India (CCI) continues to procure to support cotton prices.

Plant utilisation of pure man-made fibres and yarn manufacturers was severely affected over the first quarter of this fiscal amid the lockdown.

The volume recovery of pure man-made fibres and yarn should be quick but has started relatively late from August 2020, while cotton and blended spinners’ volumes have started recovering from June 2020.

Ind-Ra expects both the segments’ volumes to have corrected to 50-80 per cent in August 2020 and reach 70-80 per cent 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 the third quarter. Ind-Ra expects raw material prices to remain moderate in the second half of this fiscal.

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 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.

Ind-Ra expects apparel prices to remain modest in the second half of this fiscal to push sales.

Readymade garments exports recovered significantly starting June-July 2020. 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.

Demand for home textiles has been only moderately affected as these are necessary items for day-to-day life. However, the US-China trade war has affected imports from China into the United States, thus giving a strong push to exports from India.

The agency expects the demand for home textile exports to sustain in the second half of this fiscal at healthy levels achieved over August-September 2020. Ind-Ra expects Indian players to increase their already strong market share in terry towels and bed linens, led by supply chain diversification away from China.

Fibre2Fashion News Desk (DS)


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