India's textile exporters to see 20-25% growth this fiscal: Icra eport

Sharp surge in demand for home improvement products; strong festive demand seen this year backed by favourable vaccination coverage across key markets

Driven by pandemic-induced lifestyle changes, India’s textile exporters are set to see a growth of 20-25 per cent during the current financial year, said a report by rating agency Icra.

The factors that have driven a sharp surge in demand for home improvement products over the past one year are expected to sustain during the remaining quarters of FY2022, continuing on the trend of the past three quarters. Moreover, expectations of a strong festive demand this year, backed by favourable vaccination coverage across key markets is reflected in the healthy order book position of Indian home textile exporters.

Icra’s sample set of companies (comprising large and listed players, accounting for 35-40 per cent share in India’s home textile exports) are projected to clock a robust double-digit growth of 20-25 per cent in FY2022, the report said.

Pavethra Ponniah, Senior Vice President and Co-Group Head, Corporate Sector Ratings, Icra, said: “For the past three quarters, sales for the sample set have averaged 25-40 per cent higher than the three-year average for the pre-Covid period. Home textile exports was one of the first few textile segments to recover from the impact of the pandemic last fiscal, with companies reverting to year-on-year growth from Q2 FY2021 itself and reporting three consecutive quarters of double-digit growth thereafter.”

The export demand was mainly driven by the US, the largest market, accounting for 60 per cent of India’s home textile exports. Compared to a 9 per cent increase in India’s home textile product exports of $5.7 billion in FY2021, exports to the US increased by 14 per cent, while exports to the other major markets of the UK and the EU reported a year-on-year decline during the year.

Besides faster opening up, increase in exports to the US is partly attributable to the distribution model for these products, with a meaningful share accounted for by the large departmental chains that remained open even during the lockdown phase, Ponniah added.

The growth numbers are followed by a subdued 5 per cent growth in revenues reported by the sample in FY2021, primarily due to 40 per cent year-on-year dent in performance in Q1 FY2021; the sample grew by 25 per cent during the rest of the year. It is noted that the sector companies had reported 18 per cent year on year decline in operating income in the fourth quarter of FY2020 as well, as the pandemic had started affecting the key countries of export. However, even after adjusting the base for the same, Indian home textile exporters are estimated to have reported a healthy growth of 15-20 per cent in the nine-month period ended March 2021.

Icra’s channel checks suggest that the larger exporters have robust order backlog and are likely to rely more on job-work/ outsourcing to fulfil delivery commitments over the next few quarters. In terms of financial performance, improved economies of scale and softer input costs helped the companies in the sample report an improvement in operating margins in FY2021. While benefits of operating leverage are likely to sustain in FY2022, with expectations of a healthy sales turnover, cost pressures have intensified. “Cotton yarn, a key raw material for manufacturing made-ups, has been trading at nearly 40-50 per cent higher levels. Nevertheless, the rating agency expects operating efficiencies and re-negotiation of product prices amid sustained cost pressures to help companies maintain their profitability at robust levels,” the report added.

Icra’s sample reported a dip in profit margins in Q4 FY2021 as many players, particularly the larger ones, did not factor in export incentive benefits, or factored in the same at lower rates for the quarter in the absence of any clarity on the new export incentive scheme. However, with the Government notifying continuation of the Rebate of State and Central Taxes and Levies (RoSCTL) scheme on exports of apparels and made-ups till March 31, 2024, companies recognised their export incentives for the previous quarter in Q1 FY2022, reporting 500-600 bps jump in operating margins to 21.9 per cent on a sequential basis, from 16.1 per cent in Q4 FY2021. Adjusted for this, operating margins were still healthy at 17.6 per cent in Q1 FY2022 (Q4 FY2021: 20.6%), though lower than the previous quarter due to the impact of higher raw material prices. Clarity on the scheme has brought in much-needed relief to the Indian exporters, as this would enable them to effectively price their products without worrying about retrospective changes, it said.

Nidhi Marwaha, Vice President and Sector Head, Corporate Sector Ratings, Icra, said: “Going forward, while the opening up of economies will lead to some moderation in demand with increased household budgets allocated to alternate discretionary uses such as travel and dining out, greater prevalence of work-from-home vis-à-vis pre-Covid times is likely to sustain demand for home textile products. Further, higher occupancy in the hospitality sector is expected to support recovery in institutional demand, which has remained muted in the recent quarters.”