Industry Risk Score : Textile - Ready Made Garments

The Indian readymade garments (RMG) industry accounts the largest segment of the Indian Textiles and Apparels (T&A) industry making approximately 50% of the total industry. In fact, as per the World Trade Statistical Review 2018, India ranks 5th largest exporter of RMG in the world.

Further, owing to the low plant and machinery cost and with the RMG manufacturing units feasible at all size levels, the RMG sector continues to be dominated by unorganized players. Consequently, the size of the domestic market is inherently difficult to gauge and assess. However, over the past few years, increased penetration of the branded apparel has been witnessed.

The demand scenario in the domestic RMG industry is likely to be driven by rise in disposable income, increasing urbanization, changing customer preferences towards Ready to wear (RTW) garments, growing penetration of organized retail and the ever growing alternative supply channel of e-commerce. On the other hand, the exports market is largely been influenced by the shifting of the apparel manufacturing base from the developed countries such as the US and the EU to countries such as India, China, Vietnam and Bangladesh. The primary reason for the same has been the low cost associated in these countries.

Subsequently, the primary risk to which the industry remains exposed to relates to input cost. Availability of raw materials, low cost skilled manpower, power and fuel costs, and costs associated with logistics remain a key monitorable.

With advancement in technology and increasing price competitiveness from other global players, Indian RMG manufacturers will be required to undertake capital expenditure for upgrading their manufacturing facilities. In fact, there lies a scope for further improvement in the exports market subsequent to these modernization initiatives which can improve the quality of products as well.

Lately, the demand scenario in the domestic RMG industry has witnessed a steady pick up. In fact, with rise in disposable income, increasing urbanization, changing customer preferences towards ready to wear (RTW) garments from ready to stich (RTS), growing penetration of organized retail and the ever growing alternative supply channel of e-commerce is further likely to fuel demand.

Moreover, factors such as the rising awareness of apparel differentiation into office clothing, party-wear, ethnic wear and designer wear are further expected to augment growth in the industry.

On the other hand, the exports market is largely been influenced by the shifting of the apparel manufacturing base from the developed countries such as the US and the EU to countries such as India, China, Vietnam and Bangladesh. The primary reason for the same has been the low cost associated in these countries.

During FY19, exports fell by around 3% y-o-y to $16.1 billion from $16.7 billion in the previous year. The RMG exports have witnessed a fall over the past couple of years. Decline in competitiveness of Indian players post GST implementation and rising competition from countries like Bangladesh and Sri Lanka that have low production cost and enjoy preferential duty access in key markets has been the primary reason for the same.

Acuité expects the domestic market to grow moderately driven by growing population, rising disposable income level, increased penetration of organized retail.

Owing to the low plant and machinery cost and with the RMG manufacturing units feasible at all size levels, the RMG sector continues to be dominated by unorganized players. Notwithstanding, over the past few years, the industry has witnessed increased penetration of the branded apparel.

The RMG industry includes number of small and medium enterprise (SME) manufacturers owing to low entry barriers which has led to no particular player gaining large market share.

Among established players, competition is primarily among established brands and private label brands. In fact, players are increasingly focusing on both forward and backward integration by entering the entire value chain. Major clothing brands have better bargaining power, on account of low product differentiation, large number of players, and fragmented industry. There is increased focus on cost cutting, product diversification, development of new markets and maintaining product quality.

On the exports front, the overall RMG industry faces the risk of economic downturn and volatility in global markets.

Acuité believes that the competitive landscape in the domestic RMG industry remains within moderate level with the industry facing competition risk in the overseas market from countries like Vietnam, China and Bangladesh.

The primary risk to which the industry remains exposed, relates to input cost. Availability of key raw materials, low cost skilled manpower, power and fuel costs, and expenses associated with logistics remain a key monitorable.

In fact, growth of the RMG industry depends upon the availability of raw materials primarily cotton, wool, silk and man-made fibres. Prices of natural fibres are dependent upon the external environment and are thus volatile. Any fluctuation in the prices of the same leads to the final product becoming uncompetitive both domestically and in the export market.

Further, the sector is labour intensive and employs a major section of the economy. The availability of low-cost and skilled manpower is a constant challenge for the industry. Moreover, rising costs of skilled labour is a risk to the industry. Also, any change in government regulations or legislation governing labour laws will directly impact the industry.

Acuité believes that the reliance of the industry on the associated raw materials remain high and will remain a key monitorable.

The industry is susceptible to government regulations. In fact, in order to increase textile exports which includes readymade garments (RMG), the Government has undertaken several initiatives recently.

During March 2019, the Central government has approved a scheme to rebate State and Central Embedded Taxes for apparels and made-ups exports. Further, the Directorate General of Foreign Trade (DGFT) has revised rates for incentives under the Merchandise Exports from India Scheme (MEIS) for readymade garments and Made ups.

Moreover, the sector is labour intensive and employs a major section of the economy. The availability of low-cost and skilled manpower is a constant challenge for the industry. Any change in government regulations or legislation governing labour laws can directly impact the industry.

The introduction of Goods and Services Tax (GST) has made imported garments cheaper as the GST levied 5% tax for both domestic textile manufacturers and importers thus impacting domestic players.

Acuité believes that the risks pertaining to government regulations persist in the RMG industry and positive implementation of measures in favour of domestic industry to remain a key monitorable.

The Indian textile industry is vertically integrated from raw materials to finished products. In the last few years, the industry has witnessed considerable expansion, integration and technological upgradation.

In the RMG sector, the export-led manufacturing has been more organized in terms of technology and systems. Technological advancement and use of modern machinery have led to the production of better quality garments. Export-based units have established assembly lines and taken advantage of economies of scale due to large orders.

With advancement in technology and increasing price competitiveness from other global players, Indian RMG manufacturers will be required to undertake capital expenditure for upgrading their manufacturing facilities. In fact, there lies a scope for further improvement in the exports market subsequent to these modernization initiatives which can improve the quality of products as well.

Effective implementation of measures such as Technology Up-gradation Fund Scheme (TUFS), SAATHI (Sustainable and Accelerated Adoption of Efficient Textile Technologies to Help Small Industries) for reviving the powerloom sector to remain a key monitorable.

Acuité believes that in the medium term, the industry remains less exposed with respect to significant technological transformation.

Industry financial performance risk score

Operating Margin
(Marginally favorable)

Interest Coverage Ratio
(Marginally favorable)

Return on capital employed
(Marginally favorable)

Debt/ Equity
(Favorable)

GCA days
(Marginally unfavorable)

Note: The industry financial performance risk score is provided on a 6-point scale