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Capex activity of textile companies will be stronger in 2011

04 Feb '11
2 min read

Fitch Ratings has said, in a just published report, that the outlook for Indian textile companies is stable for 2011, on the back of robust domestic demand, sluggish-yet-steadily-growing export demand and an overall improvement in their credit profiles (i.e. lower gearing and leverage).

However, Fitch's outlook for Indian garment exporters is negative to stable, as they continue to face challenges of rupee appreciation against the USD. The agency expects volume gains to be partly offset due to lower rupee revenues, leading to low-to-moderate single-digit export revenue growth for garment exporters in 2011.

The agency expects the domestic apparel market to remain strong, boosted by a higher purchasing power and a greater penetration of the organised retail and favourable demographics. The growing front-end demand will filter through to downstream players, e.g. garmenters, fabric makers, spinners and traders. In contrast, despite improving demand in key export markets, rupee appreciation and rising input costs have impaired the competitive advantage of Indian garment exporters on the global front.

Fitch expects cotton and cotton yarn prices to remain firm in the current cotton season (October 2010 to September 2011).

Also, there is an uptrend in synthetic fibre and yarn prices, which is bolstered by the supply-demand gap (rising substitution for highly prices cotton) and in sync with higher input prices (which are crude derivatives).

Profitability pressures will likely filter down the value chain to cotton textile companies, depending on their positioning in the value chain, level of integration, timing of cotton buying and diversification into synthetic and other natural fibres. Spinners' margins are expected to remain protected to a greater extent as robust demand for yarn has enabled them to pass on price hikes; fabric makers and garmenters are less able to do so.

Capex activity will be stronger in 2011 than the last two years', driven by continued government support under the technology upgradation fund scheme and growing demand, which will motivate capacity expansion. Debt-funded capex will pressurise the credit metrics of the textile companies in the medium-term.

Downside risks to the outlook could stem from a double-dip recession in key export markets, competition aggravated by a sharper rupee appreciation and adverse changes in regulation (impacting raw materials or end-product prices). A positive outlook is unforeseeable against a backdrop of volatile input prices, uncertainty on yarn prices and competition restraining pricing power.

Fitch Ratings

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