Better capacity utilisation and an improved product mix revived the denim industry’s financial reports for 2010-11, but companies face challenges in the domestic market. According to industry experts, a continual price rise at retail levels may squeeze margins and usher a slowing of growth.
“Retail denim prices have been on the rise. It is yet to be seen how consumers respond. More, the industry, which has a capacity of 650-700 million metres per annum, is adding another 100 million metres, that would mean increased supply,” says Rajiv Dayal, managing director, Mafatlal Denim.
Arvind Ltd, KG Denim, Aarvee Denims & Exports Ltd and Nandan Exim were some of the better performers this year. Arvind posted 230 per cent growth in net profit at Rs 165 crore for 2010-11, up from Rs 50 crore the previous year.
“Arvind has achieved a major milestone of crossing annual revenue of Rs 4,000 crore during this year. We have not only achieved robust revenue growth but also improved operating profit margins, despite sharp increase in input costs, which vouches for our ability to increase selling prices in both domestic and international markets,” Jayesh Shah, director and chief financial officer, Arvind Ltd, had told Business Standard earlier.
Ahmedabad-based Aarvee Denims saw its profit after tax rise from Rs 23 crore in 2009-10 to Rs 33.4 crore in 2010-11, growth of 46 per cent. Chennai-based KG Denim registered a whopping 2,547 per cent rise in standalone net profit, up from Rs 17 lakh in 2009-10 to Rs 4.5 crore for 2010-11.
“In spite of rising denim prices at the retail level, demand among consumers was pretty good the whole year. More, our volumes also increased, which led to such a tremendous performance on the balance sheet,” says Narayan Swamy, general manager, finance, at KG Denim.
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Price, supply worries
It is the next few quarters that are a cause of worry. “Denim prices are still on the rise. Add cotton prices and government polices have been making the industry volatile again. More, a lot of people are adding denim manufacturing capacities, absorption of which will be a cause of concern,” says Swamy of KG Denim.
For instance, Aarvee Denims is expanding its capacity by 24 million metres in two phases. While commercial production for the first phase of another 12 million metres commenced from March, the second phase is expected to be complete by August. In all, the denim industry is likely to witness capacity rising from 650-700 million metres to 750-800 million metres, which may result in oversupply.
On the domestic front, the industry is growing at 10-15 per cent. But with more supply coming in, it may hover around or below 10 per cent in the coming days. However, this may offer opportunities on the export side,” says Dayal.
These opportunities, he adds, may rise due to China’s currency fluctuations and Pakistan’s political instability, that has already begun forcing the US and Europe to look towards India.