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09 Dec 2020
Textile industry: Weaving the script for a success story
Astitch in time saves nine, goes a popular adage. The dismantling of the quota system from January 2005, has probably given that much required stitch to a sector that was crumbling under excess capacities and unfavourable government policies. The Indian textile industry accounts for almost 14% of total industrial production and around 4% of the overall GDP of the country. For the four-month period ended April 2005, exports to the United States have moved up by 27% to touch $1.75 billion. The equity markets have noticed these potentials. This can be seen from the fact that since January, companies operating in this sector have seen a sudden surge in their share prices. Companies like Arvind mills and Century Textiles have shown price gains of 70.88% and 139.27% to trade at Rs 129.70 and Rs 314 respectively. Most of the top rung companies are traded at a P/E of 16 and analysts believe that there is still scope for re-rating many of these companies based on their future propects. Says R Rajgopal, vice president, IDBI Capital, "With the quota dismantling by the US, a new era has opened up for the textile industry in the developing world and for India in particular. Indian textile exports are expected to grow manifold in the years to come and the Indian textile industry is gearing itself for this explosive growth through requisite capex." On an average, stocks of mid-cap textile companies have gone up by almost 106% over the same period. SRF Ltd has turned out to be the top performing stock in this segment across sectors by clocking a gain of 655.34% to trade at Rs 293.45. Domestic growth driver India's gross domestic product (GDP) has increased by 6% and the per capita income has gone up by 5.2% to Rs 12,416 during 2004-05 as compared to Rs 11,799 in the previous year. With more than a billion population, the country accounts for a very low per capita consumption of textiles. India's per capita consumption is at 2.2 Kg, which is very low when compared to China's 5 Kg and Pakistan's 3 Kg. Analysts believe that the present per capita consumption in terms of length is expected to move up from 19 metres to 32 metres by the end of 2010. With the upper middle class crossing the 92 million mark by the end of 2006 and 153 million by the end of 2010, the per capita consumption for textiles is expected to move up. This, in turn, is expected to create demand for branded textile products. India is witnessing a considerable shift in the age and income profile of its population. The median age in the country is considered as 24 years against 36 in the USA and 30 years in China. The growing younger population with higher disposable income will tend to spend more in the years to come. Growing urbanization has evolved the need for retailing. Though the retail sector is at a nascent stage, much of the demand for branded textiles will be attributed to retailing in the coming years. Global demand scenario With the phasing out of the quota system, buyers across the world will have more power in selecting their source of material requirement. The global textile industry is estimated to be around $360 billion and together, both the US and Europe account for 64% of the total textile trade. Post-quota dismantling, the same figure is expected to be around $650 billion by the end of 2010. Indian textile companies command a leadership position and enjoy brand equity in supplying terry towels and bed linens to the US home textile markets. According to the latest data issued by the Office of Textile Export of America (OTEXA), textile exports to the US grew by 24.18% in January-June 2005 at 1169.28 million metres against 941.53 million metres in the first six months of the last year. Apparel exports went up by 32.31% at 413.75 million metres. Companies like Welspun India generate almost 82% of its revenue through exports and cater to retailers like Wal-Mart, Tommy Hilfiger and Shopco. India is one of the major suppliers for bath towels into the US market. Chinese checkers China and India have inherent advantages in the textile sector when compared to other countries on account of low costs of production. Though China offers lower costs, India is ahead in terms of skilled labour, fashion trends and designing. India's textile exports work out to $15 billion, constituting a 4% share of the global textile imports. This is still considered low when compared to China which accounts for a 17% market share in the global market. The share of China in USA's global imports of textiles and apparels has increased from 18.3% to 25.2%. Against this, India saw its share increase to 5.9% from the earlier share of 5.2% for the four month period ended April 2005. Given the strong presence of Indian textile companies in the entire value chain, Indian manufacturers are more competitive, post-quota. The market share of India in absolute terms is expected to touch $40 billion, which works out to a 7-8% share by the end of 2010. Now, the Indian textile industry is also riding high on the back of recent revaluation of the Chinese yuan. Says Sejal Doshi, analyst, Angel Broking, "The impact of the revaluation is going to be very little or at the most slightly positive." The Indian textile producers will become more competitive and players with pricing advantage would be able to increase their share in the global textile market. Companies will be in a better position to manage Chinese competition. Further, the closure of domestic capacities in the US is expected to create more space in the market. Global retailers India has the largest area under cotton cultivation throughout the world and ranks third in terms of crop production. Cotton textile comprises of cotton fibre, cotton yarn and fabrics made out of cotton yarn, where cotton yarn commands almost 70% of the spun yarn. The year 2003-04 saw a negative growth of 3.1% in cotton textiles. However, in the financial year 2004-05 it has shown a rise of 7.7%. In the year 2004-05, the export of cotton-based textile items consisting of cotton yarn, fabrics, made-ups and ready-made garments stood at $7.76 billion, whereas the exports of man-made textile items was at $ 2.557 billion. Further, the report shows that the cotton-spinning sector is doing well in India in comparison to synthetics which is facing a problem of increased raw material costs. The exports of cotton-based garments like home-made terry towels are expected to generate higher growth. As per McKinsey estimates, the global trade in home textiles is expected to grow from the current level of $8.6 bn to $23 bn by 2010. Post-dismantling of quotas, the scale of operation will play a crucial role in attracting global retailers. These retailers will be selective in terms of their requirement and the country. Larger and integrated players would have the advantage in terms of pricing, volume, quality and delivery. Looking at the domestic and global demand scenario, Indian textile companies are gearing up to meet the global and domestic demand. Companies are building more capacities to increase the current production levels. Companies like Welspun India have invested in new capacities recently. Says Shailesh Dhamkar, analyst, SBI Capital, "Growth is sustainable on the back of demand in the global as well as domestic market. In the long run, players with stable and innovative products having global level capacities will survive, which in turn will result in some kind of consolidation in the years to come." However, the growth of the Indian textile industry will be concerned over the issues of global outsourcing, volatile cotton prices and currency fluctuations. One of the biggest threats that analysts believe Indian textiles will face is that of China emerging as one of the major competitors. Corporate initiatives Following the quota phase-out, the textile market has seen a spurt of activities all across the industry. The sector analysis of Q1 results reveals that the textile industry is amongst one of the best performers after the hotels, paper and construction sectors. The current size of the Indian textile industry is $36 billion and is expected to grow by 18.75% CARG to touch $85 billion by the end of 2010. Out of the total estimated increase, the domestic market share would be around $45 billion and export will account for $40 billion. About 60% of exports will be attributed to garments. In order to keep up with this increased demand, various government schemes have also recently seen a steep rise in the funds allocated to them. There is an increase of 85% in the funds allocated to the Technology Upgradation Fund Scheme (TUFS) in 2004-05 over the average amount of 1999-2004. Likewise APE, TCIDS, CTM have seen hikes of 216%, 88% and 52% respectively. With the rationalisation of the excise duty textile structure, there are chances of more growth in the synthetic sector. For 2005-06, excise duties have been reduced from 24% to 16% on PF yarn, partially oriented yarn and polyester textures yarn. To avail the potential of the textile industry, around 25 companies have come up with total investment plans of over Rs 8,500 crore in greenfield and capex ventures. With hardly any industry bottlenecks like excess capacity and liquidity crunch because of high gearing, the textile industry can finally start spinning a yarn. No pun intended.
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