Industry Risk Score : Textiles – Cotton Yarn

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 organized and unorganized players. In addition to being highly capital intensive, competitive scenario is also moderate to high within the industry. In fact, the organized players face competitive pressure from unorganized 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).

India is the second largest producer and exporter of textiles after China. The textile and apparel industry constitutes ~15% of the total exports of the country. Though the variables like currency fluctuation remains a challenge for the industry, Indian textile and apparel industry has grown at CAGR of 10% from year FY06 to FY19. Cotton yarn comprises almost one-third of the cotton textile industry, next only to cotton made-ups (all fibres) with a share of ~50%; the balance ~20% being cotton fabrics.

Cotton yarn production increased by 3% y-o-y to 42.1 MT in FY19 from 40.7 MT in FY18. Exports contributes 25-30% of the total cotton yarn demand. Cotton yarn exports increased by 15% on y-o-y basis to 1260.8 million kg in FY19 from 1099.6 million kg in FY18. However, the industry saw a steep fall of 33% in the export for the period Apr-June 2019. This was primarily due to high pricing pressure in the global markets, rationalization of taxation system and growing competition from other emerging economies, which enjoy preferential duty access in key markets. The domestic market, which comprises two-thirds of the total cotton yarn produced in India, is seeing an upward shift. A major portion of yarn produced in India is consumed by fabric and apparel manufacturers. Demand for textile products has driven increased penetration of organized retail, favorable demographics and rising income levels.

Input related risk for the industry mostly emanate from volatility in cotton prices, which comprise major operating costs of most organized players. Despite, the industry favorably positioned with an adequate raw material base as India is one of the world’s largest producer of cotton, risks emanate from dependence on monsoon and poor inventory management infrastructure, leading to price volatility. The industry is also exposed to rising power and fuel costs, and lack of availability of cheap skilled manpower.

The cotton yarn 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 organized players catering to export markets in order to retain competitiveness in the growing markets.

India has the world's second largest spinning capacity. Being the principal raw material for the domestic textile industry, cotton plays an important role in the growth of textile sector. According to the data published by the Cotton association of India (CAI), India’s overall cotton production during the year decreased by 15% y-o-y to 312 lakh bales from 365 lakh bales in FY18, reflecting a slight concerning trend.

Cotton yarn production however, rose by 3% y-o-y to 42.1 MT in FY19 from 40.7 MT in FY18. The cotton production is majorly affected by the weak export demand coupled with the increase in cotton prices and other raw material which affects the production capacity of the Indian spinning mills.

Exports of cotton yarn from India stood at 1260.83 million kg in FY19. However, the export of cotton yarn has fallen by 33% to 226.87 million kg in April-June 2019 as compared to 338 million kg for the corresponding period of the previous year. Decline in the export to the leading export market like China, Bangladesh, Vietnam, South Korea affected the overall export of the country.

Over the last few years with gradual capacity built up it has led to low per unit cost of production, giving India a strong 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.

On the domestic front, increased penetration of organized retail, favorable demographics and rising income levels are driving the demand for textiles.

Acuité finds demand risk for cotton yarn to be moderate. Notwithstanding, the favorable growth trends in retail based consumption in the domestic market, export markets possesses a subdued growth scenario.

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.

The top five players as per market share in the cotton yarn industry are Trident Limited, Vardhman Textiles Limited, Nahar Spinning Mills Limited, SEL Manufacturing Co. Limited and Sintex Industries Limited with a market share of ~20%.

There are varied type and scale of manufacturers, differentiated based on manufacturing capacity and quality of products. India has ~23 lakh powerlooms and ~24 lakh handlooms. Currently, spinning is the most consolidated and technically efficient segment of India’s textile industry.

In global market, India faces competition from countries like Bangladesh which have competitive manufacturing cost and also enjoy duty-free access to major textiles and apparel markets like Europe. For India the largest buyer of cotton yarn is China, however the imports from India is subjected to duty whereas competing countries like Vietnam, Indonesia, Pakistan and Cambodia enjoys duty free access to Chinese markets.

Acuité believes that since the overall industry is highly fragmented, the competition risk in high and will remain a key monitorable going ahead.

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 inability to pass on the increased cost on to end consumers.

The industry is also exposed to rising power and fuel costs, and lack of availability of cheap skilled manpower.

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%). 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.

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

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

At a broad level, the fabric manufacturing includes processes such as bleaching, dyeing and printing, which affects 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.

As the Indian cotton 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 modernisation 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 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. 

Industry financial performance risk score

Operating Margin
(Marginally unfavorable)

Interest Coverage Ratio
(Marginally unfavorable)

Return on capital employed
(Marginally unfavorable)

Debt/ Equity
(Marginally favorable)

GCA days
(Marginally unfavorable)

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