The Indian Textiles and Apparels (T&A) industry is one of the most important sectors in terms of economy and employment it generates. The country’s textile industry is predominantly a cotton-based industry. Further, the industry is highly fragmented, with large number of organised and unorganised players. In addition to being highly capital intensive, competitive scenario is also moderate to high within the industry. In fact, the organised players face competitive pressure from unorganised players on account of the wider variety of products offered by the latter. With textile industry being primarily a cotton-based industry, the apparel exports are also skewed primarily towards cotton followed by man-made fibre (MMF).

The cotton textile industry comprises raw cotton, cotton fibre, yarn, fabric and garments. The cotton fabric segment accounts for the largest share (~60%) in the total fabric production owing to higher preference for cotton clothing due to hot and humid climate. India produced 37 million bales of cotton in FY18 and is expected to harvest 36.1 million bales in FY19.

The textile value chain includes spinning, weaving, knitting and garmenting using different materials such as cotton, jute, silk, man-made and synthetic fibres. Also, the dynamics of cotton yarn and cotton fabric segments remain largely interrelated with fall in demand in one is most likely to accentuate in the other as well. The industry includes high capital investments primarily in the spinning sector. Consequently any tepid demand domestically, impacts the sector negatively thus resorting players to export more ensuring capacity utilisation. With, the cotton yarn sector providing sustainable income to farmers it remains a prerequisite to manage the demand- supply situation in the industry. In fact, recently the textile industry has raised concerns with continuous fall in cotton yarn exports due to decline in demand in importing countries such as China, Bangladesh and South Korea. Further, with the duty-free access given by China to Pakistan it further aggravates the domestic scenario.

A major proportion of cotton fabric produced in India is consumed by home textiles and apparel manufacturers. Demand for textile products is driven by increased penetration of organised retail and rising income levels. Demand for the cotton segment has however, dampened lately due to relative price dynamics of man-made and blended fabrics. The cotton fabric industry comprises integrated and commodity players. Integrated players have a presence in the entire/ substantial part of the value chain, while commodity players focus more on bulk production and are engaged in spinning and weaving operations, and supply of yarn. The analysis focuses on commodity players, largely operating in the organised market.

The industry faces moderate risk of introduction of new laws, policies or regulations. The industry is required to continuously invest in latest machinery to manage costs, improve quality and productivity. This however pertains to organised players catering to export markets, to retain global competitiveness.

Demand & Supply Scenario

4/6

A major proportion of cotton fabric produced in India is consumed by home textiles and apparel manufacturers. Demand for textile products is driven by increased penetration of organised retail and rising income levels. Demand for the cotton segment has however, dampened lately due to relative price dynamics of man-made and blended fabrics.

The cotton fabric segment accounts for the largest share (~60%) in the total fabric production owing to preference for cotton clothing due to the hot and humid climate. India produced 37 million bales of cotton in FY18 and is expected to harvest 36.1 million bales in FY19 as per the latest estimates. Indian exported cotton fabrics and madeups comprise around 50% of the overall cotton textile exports in value terms. Further, US, Bangladesh and Sri Lanka form the leading export market for India.

Over the last few years with gradual capacity built up it has led to low per unit cost of production, giving India a competitive cost advantage relative to its global peers. Going forward, capacity additions are however expected to slow down due to overcapacity, subdued demand in specific segments and reduced central government benefits. Further, with many of the competing countries gaining access in key export markets such as China, South Korea and Turkey (mainly on account of the preferential access given by the importing countries) can lead to the contraction in India’s market share.

Acuité believes demand risk for cotton fabric to be moderately favourable owing to stable growth in demand in the domestic market.

Nature & Extent of Competition

3/6

The industry is highly fragmented, with large number of organised and unorganised players. In addition to being capital intensive, competitive scenario is also moderate to high within the industry. In fact, the organised players face competitive pressure from unorganised players on account of the wider variety of products offered by the latter.

Overall, ~2,300 processors are operating in India, which includes ~2,100 independent units with the rest being integrated with spinning, weaving, or knitting units. The industry consists of about ~23 lakh powerlooms and ~24 lakh handlooms.

The powerloom segment accounts for ~63% of the total fabric production and contributes significantly to the export earnings. Some of the top players include Arvind Ltd., Bombay Rayon Fashions Ltd. and Indo Count Industries Ltd. comprising 15- 20% of the total market share of fabric.

On the exports front, competition is primarily amongst organised players on account of product differentiation, quantity and capacity to address large orders in a timely manner. Further, exporters are also exposed to differential import duties. In fact, government policies and export benefits under FTA, duty drawback continue to be critical in promoting the export of cotton textiles from India.

Acuité believes that since the industry is highly fragmented, the competition risk persists in the segment. Further, competition from players in the export market too present’s a challenge.

Input Related Risk

3/6

Input related risk for the industry mostly emanate from volatility in cotton prices, which comprise major operating costs of most organised players. Despite, the industry favourably positioned with an adequate raw material base, as India is one of the world’s largest producer of cotton, risks arise from dependence on monsoon and poor inventory management infrastructure, leading to price volatility. Any increase in cotton prices is likely to hit profit margins of textile and apparel players owing to their constraint to pass on the increased cost to end consumers. Further, the industry is also exposed to rising power and fuel costs.

Most of the organised players in the industry are highly mechanized, and thus, power and fuel costs form a significant component of the operating costs (8-10%). To address power related risks, large manufacturers are increasingly relying on captive power generation plants. Further, though the cotton fabric industry is labour intensive, and availability of skilled manpower is a constant challenge, the labour cost of organised players is lower on account of highly mechanized operations.

Acuité believes that owing to the high dependence of the industry on cotton, reliable and affordable supply poses moderate risk to the cotton fabric industry in terms of input costs.

Regulatory Risk

4/6

The government has taken several initiatives to promote the textile and apparel industry through schemes and budget allocations. The GST rate on cotton fabric is 5% which is expected to rationalize cotton fabric industry, considering that a significant portion of the industry operates in the unorganised sector.

Moreover, the fabric manufacturing also involves processes such as bleaching, dyeing and printing, which lead to affect the environment. Thus the industry is governed by various environmental laws and regulations, both at central and state levels. Further, 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.

Acuité believes that the industry’s exposure to both central and state level regulatory policies presents a challenge albeit at a lower level.

Technology Risk

3/6

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 modernization poses challenge in terms of managing costs, productivity and quality, especially for those catering to export markets. Technology upgrades may also be imperative from the perspective of environmental compliance and optimum utilization 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 impetus to upgrade technology in mills to improve efficiencies and comply with environmental norms.

Industry financial performance risk score

Operating Margin
(Unfavorable)

Interest Coverage Ratio
(Unfavorable)

Return on capital employed
(Unfavorable)

Debt/ Equity
(Marginally favorable)

GCA days
(Unfavorable)

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