Industry Risk Score : Textiles – Cotton Fabric

Executive Summary

Cotton fabric segment accounted for the largest share (~60%) in total fabric production (66.5 billion sq m) in FY 2017-18 and increased from 31.7 billion sq m to 39.9 billion sq m during FY11-FY18 recording a CAGR of ~3.5%. In FY 2017-18, India exported cotton fabric worth Rs. 15,120 crores, comprising ~20% of the overall cotton textile exports. While the overall export of cotton textile from India increased marginally by 0.09%, cotton fabric segment drove industry exports, which grew at 5.36% during the year.

A major proportion of cotton fabric produced in India is consumed by home textiles and apparel manufacturers, both of which are seeing an upward shift. Demand for textile products is driven by increased penetration of organised retail and consumerism, favourable demographics and rising income levels. Demand for the cotton segment has, however, dampened to some extent due to relative price dynamics of man-made and blended fabrics. However, the Economic Survey 2017-18, recognising the tremendous potential in the sector, has projected growth on the back of available opportunities, robust raw material base, availability of skilled workforce and other competitive factor costs. Overall, the demand risk for cotton fabric industry is favourable.

The Indian cotton fabric industry is highly fragmented, with organised and unorganised players. The industry is highly capital intensive and competitive due to its commoditised nature. The organised segment also faces competitive pressure from unorganised players on account of the wider variety of products offered by the latter. On the exports front, competition is primarily amongst organised players, mainly on account of product differentiation and capacity to address large orders in a specific time. Overall, the competition risk for the cotton fabric industry (organised players) is favourable.

Input related risk for the industry is limited. The concerns mostly emanate from volatility in cotton prices, which comprise major operating costs of most organised players. Overall, the industry is favourably positioned with a strong raw material base as India is the world’s largest producer of cotton. While cotton production related risks are adequately diversified with multiple production geographies and large number of crop varieties, dependence on monsoon and poor inventory management infrastructure continue to be risk areas, leading to price volatility. The industry is also exposed to other risks factors such as rising power and fuel costs and lack of availability of cheap and skilled manpower.

The industry faces moderate risk of introduction of new laws, policies or regulations, or changes in the interpretation or application of existing laws and removal of subsidies. The industry is required to continuously invest in state-of-the-art machines to manage costs, improve quality and productivity. This is more so for organised players catering to export markets, to retain competitiveness in the growing markets.

Overall, Acuité believes that the Indian cotton fabric industry risk will remain favourable in the short to medium term. Increased exports, boost in domestic consumption and favourable government policies would be the key determinants.

Key Risks & Attributes

  • Fluctuations in and regulation of raw material (cotton) supply and prices
  • Agro-climatic conditions
  • Domestic market sensitive to consumer spends, linked to economic cycles
  • Trade policy of importers
  • Foreign exchange risk
  • Risk of technology change and associated capital costs for upgradation


The Indian textile industry contributes to ~4% of the country’s gross domestic product, ~10% of manufacturing production and ~12% of the country’s export earnings, and employs over 45 million people. The domestic textile industry is projected to reach USD 223 billion by 2021 from USD 150 billion in November 2017. India is also the world’s second largest textile exporter; exports stood at an estimated Rs. 274,400 crores in FY 2017-18 and clocked 6.9% CAGR over FY06-FY18.

The cotton textile industry comprises raw cotton, cotton fibre, yarn (cotton, synthetic, blended), fabric and garments. In India, the presence of cotton in the textile chain is close to 70% vis-à-vis 30% from synthetics and man-made fibres, an inverse pattern compared with the global trends. This is due to the abundant supply of cotton, favourable climatic conditions paving the way for a large area under cotton cultivation, and preference for cotton clothing due to hot and humid climate. India’s textile manufacturing setup is uniquely positioned with production facilities across each level of the manufacturing value chain, from fibre to finished product. Cotton fabric comprises almost 20% of the cotton textile industry, with the cotton yarn segment around 30% and cotton made-ups with the balance share of ~50%. While the overall export of cotton textiles from India increased marginally by 0.09%, cotton fabric reported a growth of 5.36% during FY 2017-18.

The cotton fabric industry comprises integrated and commodity players. Integrated players have a presence in the entire or substantial part of the value chain, while commodity players focus more on bulk production and are engaged in spinning and/or weaving operations and supply of yarn or grey fabric. Fabric finishing / processing, which includes dyeing, printing, and other cloth preparation, is also dominated by a large number of independent, small-scale enterprises. This report mainly focuses on commodity players, largely operating in the organised market.

Demand & Supply Scenario


Cotton fabric accounted for the largest share (60%) in total fabric production (66,514 million sq m) in FY 2017-18 and increased from 31,718 million sq m to 39,894 million sq m during FY11-FY18 recording a CAGR of ~3.5%.

On the domestic front, increased penetration of organised retail and consumerism, favourable demographics and rising income levels are driving the overall demand for textiles. Home textiles and apparel manufacturers are the key consumer segments for the cotton fabric industry. Demand for the cotton segment has, however, dampened to some extent due to relative price dynamics of man-made and blended fabrics as the cost of production of cotton textiles is higher vis-à-vis man-made fabric. Also, man-made fibres are low maintenance and cheap, thus are steadily gaining importance for apparel manufacturing. However, as per the Economic Survey 2017-18, there is tremendous potential for growth in the textile and clothing sector in the country, and India is well placed to make the most of the available opportunities, with a robust raw material base, good availability of skilled workforce and competitive factor costs.

The apparel segment consumes a sizeable chunk of total fabric produced in the country. Following the announcement of demonetisation in November 2016, demand for apparels declined temporarily, as a significant portion of the total fabric production in the country comes from the unorganised sector. Thus, demonetisation led to shortage of liquid funds for regular operations, sale of finished goods and purchase of raw materials, spares and accessories, among others. Consequently, the overall fabric production decreased by 1.7% in FY 2016-17 over the previous year and production of cotton fabric declined marginally by 1%. However, the demand for fabric revived gradually as the liquidity situation improved. In FY 2017-18, the domestic fabric production increased by 4.8% over the previous year.

Growth in the real estate market has led the demand for home textiles. The segment includes home furnishings such as sheets, pillowcases and towels. Also, khadi products have gained immense popularity over the past few years. As per the Khadi and Village Industries Commission, sale of khadi products has jumped over three-fold in the last 3 financial years - from Rs. 1,170 crores in FY 2014-15 to Rs. 2,008 crores FY 2016-17 - with an average annual increase of 31%. Denim segment continues to comprise a significant proportion of the cotton fabric segment. India dominates denim production in the Asia Pacific region, with a total capacity of 1,200 million mtrs per annum of denim fabric manufacturing. 65% to 70% of the total production is consumed in the domestic market. Overall, India has a strong position in manufacturing of knitted and woven fabric, and opportunities in value-added and specialty fabrics offer potential for growth.

In FY 2017-18, India exported cotton fabric worth Rs. 15,120 crores, an increase of 5% over the previous year, comprising ~20% of the overall cotton textile exports. Bangladesh was the leading market for exports from India during FY 2017-18 with a share of ~20%, followed by Sri Lanka and the United States with ~11% and ~7% share, respectively. During this period, the demand for Indian cotton fabrics from the United States and Senegal grew most significantly by 20% each.

Capacity built gradually over years has led to low per unit cost of production, giving India a strong competitive cost advantage relative to its global peers. Further, good raw material availability and low labour costs provide a significant competitive advantage to India as production cost base. In the last few years, there have been lower capacity additions in the industry due to volatile demand and cotton / cotton yarn prices. Going forward, capacity additions are expected to slow down due to overcapacity, subdued demand in specific segments and reduced central government benefits due to changes in the Technology Upgradation Fund Scheme (TUFS).

Acuité finds demand risk for cotton fabric to be moderately favourable. This is mainly due to growth in apparel retail and real estate based consumption in the domestic market. Export markets are expected to provide a favourable environment with India’s continued cost competitiveness with a large raw material production base of cotton.

Nature & Extent of Competition


The Indian cotton fabric industry is highly fragmented, with organised and unorganised players. Overall, about 2,300 processors are operating in India, including about 2,100 independent units and 200 units that are integrated with spinning, weaving, or knitting units. The industry consists of about ~23 lakh powerlooms and ~24 lakh handlooms, wherein modern shuttle-less looms account for less than 4%.

The powerloom segment accounts for ~63% of the total fabric production and contributes significantly to the export earnings. The top players are Alok Industries, Arvind Ltd., Bombay Rayon Fashions Ltd., Vardhaman Textiles and Indo Count Industries Ltd., comprising ~20% of the total market share of fabric.

The cotton fabric industry is highly capital intensive and competitive due to the commoditised nature of the product. There is limited differentiation, mostly based on manufacturing capacity and quality of products. Due to high capital investment, entry barriers in the organised space are higher. However, there is stiff competition in the domestic market among unorganised players on account of product variety, further limiting the pricing power and margins of organised players.

On the exports front, competition is primarily amongst organised players on account of product differentiation, quantity and capacity to address large orders in a specific time. Further, exporters have to deal with differential import duties for their products in leading markets. Government policies and export benefits under the Foreign Trade Policy, duty drawback and free trade agreements, continue to play a crucial role in promoting the export of cotton textiles from India, and their profitability. Further, emerging foreign countries, such as, China, Mexico and Pakistan with lower production costs, may pose a big threat and may erode India’s competitive advantage.

Acuité believes that though the overall industry is highly fragmented, the competition risk in the organised segment is lower due to entry barriers such as capital investment and production capacities. However, competition from players in the export markets continues to be high from manufacturers in the emerging markets. Overall, the competitive landscape in the cotton fabric industry is moderate with supportive government tax incentives and trade policies.

Input Related Risk


Input related risk for the cotton fabric industry mostly emanates from the availability of and pricing of cotton / cotton yarn. Overall, the industry is favourably positioned as India is the world’s largest producer of cotton, with a share of ~27% in FY 2016-17. Production of raw cotton in India grew at a CAGR of 2.3% during FY07-FY17 providing adequate raw material for the cotton yarn spinning industry. Cotton prices moved from Rs. 91 per kg in April 2016 to Rs. 108 per kg in March 2018 and further to Rs. 121 per kg in September 2018. Prices are slated to further rise marginally by 2-3% in FY 2018-19, but this is unlikely to have any material impact on yarn manufacturers and fabric manufacturers. Further, with the expiry of Multi-Fibre Agreement (MFA) in January 2005, cotton prices in India are fully integrated with international rates.

Cotton production related risks are adequately diversified with multiple production geographies and large number of crop varieties. Here, dependence on monsoon and poor inventory management infrastructure pose some risk. Further, cotton being a seasonal crop, inventory management plays an important role in keeping the cost and quality under control. Cotton being an agricultural commodity, its availability and price are also dependent on government regulations and domestic and foreign trade policies, constraining the bargaining power of manufacturers. Efficient cotton procurement strategies including contract farming, proficiency in estimating the future trends in the cotton market, proximity to cotton cultivation areas and optimal quantity of cotton procurement are being adopted as risk management strategies.

Most of the organised players in the industry are highly mechanised, and thus, power and fuel costs form a significant component of the operating costs (8-10%). The quantum and nature of power availability for smaller players are primarily dependent on government provisions. To address power related risks, large manufacturers are increasingly relying on captive power generation plants. Though the cotton fabric industry is labour intensive and availability of cheap and skilled manpower is a constant challenge, the labour cost of organised players is lower on account of highly mechanised operations (labour cost constitutes 6-8% of the cost). However, any change in government regulations or legislation governing labour laws tends to directly impact the cost of production.

Acuité believes that dependence of the industry on cotton, raw material prices, fuel costs and availability of skilled labour pose moderate risk to the cotton fabric industry in terms of input costs. Volatility of global cotton prices and competition from other emerging economies are key monitorables.

Regulatory Risk


The government has taken several initiatives to promote the textile and apparel industry through schemes and budget allocations (See End Note). The introduction of Goods and Services Tax (GST) is expected to result in ‘fibre-neutrality effect’, which means that all man-made and natural fibres will be treated equally from the tax point of view. The GST rate on cotton fabric is 5%; a low and uniform GST is expected to lead to further standardisation of cotton fabric industry, considering that a significant portion of the industry operates in the unorganised sector, also presenting scope for better supply chain management in the industry. While implementation of GST is a positive development in the long term, its impact, especially on exports, in the near future is still unclear.

Fabric manufacturing involves processes such as bleaching, dyeing and printing, which consume vast amounts of water and chemicals and release numerous volatile agents into the environment. The industry is governed by various environmental laws and regulations at central and state government levels. Stricter laws and regulations may also impose new liabilities or require additional investment in related equipment and processes.

The cotton industry is geographically concentrated around the cotton producing states and is therefore dependent on the general economic conditions and policies relating to the textiles industry in respective states. While central and state governments have provided several incentives to the textiles sector, the industry faces the risk of introduction of new policies or regulations, and removal of schemes and subsidies applicable to yarn / fabrics and downward linked industries of cotton textiles and garments.

Acuité believes that with favourable government initiatives and substantial support, the regulatory risk faced by the cotton fabric industry is low in the medium term.

Technology Risk


As the Indian cotton fabric industry is largely fragmented, smaller players are prone to technology risks. Raw material and power consumption is higher compared to modern weaving mills and international counterparts.

Lack of modern machines poses challenges in terms of managing costs, productivity and quality, especially for those catering to export markets. Large weaving mills need continuous incremental investments for periodic rebuilding, regular maintenance and technology upgrades, adversely affecting the cost effectiveness of processes. Technology upgrades may also be imperative from the perspective of environmental compliance and optimum utilisation of key inputs such as water, power and chemicals.

Acuité believes that in the medium term, the industry faces risk on account of advancement in technology and related capital expenditure for upgradation. There is a growing need to upgrade technology in mills to improve efficiencies and comply with environment protection norms.

Operating Margin


In terms of net sales, the cotton fabric industry witnessed an average annual increase of about 2.0% in the last 3 years - FY16- FY18. Average EBITDA margins dropped from 19.7% to 13.9% during the period. This was due to short-term decline in export demand from key markets including China and due to demonetisation. Dependence on climatic conditions, volatility in raw material/ input/ working capital costs and high competition are the key variables.

Interest Coverage


Interest coverage declined from 2.45 times in FY 2015-16 to 1.82 times in FY 2017-18. The average interest coverage during the period was 2.13 times. While the sector is leveraged, interest coverage remains favourable due to high operating margins of players.

Return on Capital Employed


ROCE ratio declined from 6.2% to 2.2% during the period with an average of 4.2%. This is on account of capital intensive nature of the business.

Debt / Equity


The cotton fabric industry showed a stable and favourable debt-equity ratio with an average of 1.14 times, during the 3-year period. The industry average was 0.93 time in FY 2017-18.

GCA (Days)


The industry presented a moderately favourable liquidity profile in terms of gross current assets with an average of 173 days for the 3-year period. For FY 2017-18, the industry had an average GCA of 195 days.

Industry Financials and Averages

Fact Sheet (As on Year Ended March 31st)SUM Unit 201803 201703 201603
Net Sales Rs. Cr. 25,597 26,113 24,627
OPBDIT (Excl. NOI) Rs. Cr 3,566 4,251 4,842
Depreciation Rs. Cr. 1,268 1,203 993
PAT Rs. Cr. 646 1,213 1,538
Net Cash Accruals Rs. Cr. 1,914 2,416 2,530
Networth Rs. Cr. 14,481 11,885 10,025
Total Debt Rs. Cr. 13,432 14,052 13,968

Average Unit 201803 201703 201603
EBITDA Margin % 13.9% 16.3% 19.7%
PAT Margin % 2.5% 4.6% 6.2%
ROCE % 2.2% 4.5% 6.2%
Interest Coverage Times 1.82 2.47 2.45
Debt to Equity Times 0.93 1.18 1.39
Debt to EBITDA Times 3.77 3.31 2.88
GCA Days Days 195 171 153

The entities considered in the static pool are as under:

  1. Aarvee Denims & Exports Ltd.
  2. Arvind Ltd.
  3. Bombay Rayon Fashions Ltd.
  4. Himatsingka Seide Ltd.
  5. Indo Count Industries Ltd.
  6. Jindal Worldwide Ltd.
  7. K G Denim Ltd.
  8. Loyal Textile Mills Ltd.
  9. Mafatlal Industries Ltd.
  10. Nandan Denim Ltd.
  11. Suryalakshmi Cotton Mills Ltd.
  12. Welspun India Ltd.

IRS Definitions

Acuité Industry Risk Scores are assigned on a six-point scale, with 1 indicating ‘High Risk’ and 6 indicating ‘Highest Safety’. The intermediate scores are defined in the table below:

Industry Risk Score Risk classification of the Industry
ACUITE IRS 1 Highly Unfavourable
ACUITE IRS 2 Unfavourable
ACUITE IRS 3 Neutral
ACUITE IRS 4 Marginally Favourable
ACUITE IRS 5 Favourable
ACUITE IRS 6 Highly Favourable

End Note: Government’s key initiatives to promote the textile and apparel industry:

  • A significant and increased allocation in the Union Budget 2018-19 towards the Amended Technology Upgradation Fund Scheme
  • Allocation for Remission of State Levies, Scheme for Integrated Textile Parks and Make in India campaign among others. The government has allocated ~Rs. 112 crores towards schemes for powerloom units
  • The Union Ministry of Textiles, along with Energy Efficiency Services Ltd., has launched a technology upgradation scheme called Sustainable and Accelerated Adoption of Efficient Textile Technologies to Help Small Industries for reviving the powerloom sector of India
  • The handloom clusters under the National Handloom Development Programme have been allocated Rs. 396 crores and the Integrated Processing Development Scheme, Rs. 3.8 crores
  • As of November 2016, the Ministry of Textiles had signed memorandums of understanding with 20 e-commerce firms to engage with various handloom and handicraft clusters
  • The Government of India plans to connect around 50 million women in Indian villages to charkha (spinning wheel) in the next 5 years with the aim of providing employment and promoting khadi


Acuité IRS should not be treated as a recommendation or opinion that is intended to substitute for a financial adviser's or investor's independent assessment of whether to buy, sell or hold any security of any entity forming part of the industry. Acuité IRS is based on the publicly available data and information and obtained from sources we consider reliable. Although reasonable care has been taken to ensure that the data and information is true, Acuité, in particular, makes no representation or warranty, expressed or implied with respect to the adequacy, accuracy or completeness of the information relied upon. Acuité is not responsible for any errors or omissions and especially states that it has no financial liability whatsoever for any direct, indirect or consequential loss of any kind arising from the use of Acuité IRS.

Our exciting journey started in 2005 with rating of bank borrowers most of whom were small and medium enterprises. At that time, credit rating was a concept known only to large issuers of capital market instruments. Since then, like a caterpillar transforms itself into a beautiful butterfly, we transformed to rate bonds, bank facilities of large corporates and issuers across industries. Along came many achievements - SEBI Registration in 2011, RBI accreditation in 2012, 50,000 ratings in 2018, 5,000 Bond and Bank Loan Ratings in 2017, launch of India's first Android and iPhone app to disseminate rating, tamper-proof QR-code-enabled rating rationales, and SMERA Terminal to name a few.

Now is the time to re-emphasize our increasing footprint across all segments of ratings through the launch of our new name - 'Acuité'.

The name has changed. The spirit of upholding highest standards of analytical rigour, continuous improvement, excellence in our processes and quest for innovation remains the same. We would like to re-emphasize that we will continue to work hard to provide independent, unbiased and timely opinion of highest standard.

Acuité means 'sharpness and clarity of thought and vision'. Let our research and ratings help you take decisions with confidence.

Sankar Chakraborti