With many new companies entering the denim fabric space and the existing companies expanding their production capacities in anticipation of high demand, experts fear enhanced competition would put pressure on denim makers’ profit margins.
“Lots of companies are expanding their operations. Relative newcomers are also boosting their denim capacities. This will put pressure on margins of existing players,” said P R Roy, senior textile consultant and former group chief executive (textiles) of Arvind Ltd.
According to analysts, domestic as well as international demand for denim has been growing at the rate of 25-30 per cent yearly, despite the economic crisis. The US export demand is also high. Moreover, in the next one year, demand is expected to go up 13 per cent, they said.
But with new players entering the sector, competition has become tighter. “Margins will start to come under pressure in the next six months as new players are entering this space and the existing players are also increasing their capacities, thus increasing competition among players,” said an analyst with CARE Ratings.
According to analysts, small players’ margins will get affected badly compared with big companies, such as Arvind Ltd, Aarvee Denims and Exports Ltd and KG Denim Ltd
Aarvee Denims and Exports increased its denim fabric capacity to 84 million metres per annum in February from 77 million metres per annum last year. “With the number of players increasing in this space, small players’ margins will eventually start coming under pressure,” said Utsav Pandwar, chief financial officer, Aarvee Denims and Exports.
However, experts feel the pressure could be short-lived. “Today, we have 24-25 denim mills and more are coming in. However, the increased supply of denim fabric will result in shrinking margins only for a short time. Later, we expect garment converting capacities also to increase, thereby meeting the demand considerably. This will again ease margin pressures as supply will meet demand,” says Rajesh Dudeja, founder of the Denim Club of India.
Meanwhile, experts offer remedies for shrinking margins. “Bigger denim players may have to look more toward exports for better margins. Currently, increased capacities will only increase competition for many within the domestic market. Hence, to avoid that, denim manufacturers may have to spread their reach to other overseas markets,” said Roy.