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Indian denim fabric units to keep on facing margin pressure
May '18
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Courtesy: Photo by it's me neosiam from Pexels
India’s denim fabric industry will continue to face margin pressures during fiscal 2018-19 due to oversupply, with 15-20 per cent of the total capacity remaining underutilised, according to estimates by India Ratings and Research (Ind-Ra). Garment making capacity will grow at a slower pace than fabric capacity and softening cotton prices may cushion margin.

Additionally, competition will intensify as several players have undertaken capacity additions to add another 100-150 million metres per annum (mmpa) by that fiscal, the organisation said in a press release.

India is one of the leading denim fabric manufacturers in the world, with a manufacturing capacity of about 1,500 mmpa.

The long-term demand potential for the segment remains intact due to denim’s versatile fashion appeal among young populace, rising disposable income and untapped semi-urban pockets of the country. However, Ind-Ra expects denim fabric capacity additions to outpace garmenting capacity additions over the short term, translating into a continued denim fabric surplus in the market.

Though the denim fabric industry is cyclical in nature and is characterised by periods of excess capacity, Ind-Ra expects the present downturn to be relatively prolonged, partly on account of the regulatory disruptions that the industry underwent in the last two fiscals.

The sector’s operating margins are expected to remain in the range 10-11 per cent in the current fiscal.

Cotton forms over 35 per cent of the total raw material requirement for denim manufacturers. With farmers switching from soybean to cotton, the 2017-2018 season has witnessed about 19 per cent rise in cotton acreage. However, the overall cotton production is likely to rise by only 10 per cent due to bollworm attack. The higher production may soften cotton prices during this fiscal and help curtail margin contraction for denim fabric manufacturers.

Ind-Ra expects the impact of regulatory disruptions to linger on during the first half of this fiscal for small scale market participants involved in stitching, washing, garment manufacturing and sewing, resulting in demand headwinds for the sector growth.

The credit profile of denim fabric manufacturers is likely to moderate over this fiscal amid the continuing contraction of operating margin and debt-funded capacity expansions. (DS)

Fibre2Fashion News Desk – India

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