India Ratings and Research (Ind-Ra) has revised the textile sector's outlook to negative for FY21 from stable as weak domestic demand growth, threat of cheap imports and dwindling incentives and exports are likely to keep volumes muted.
It, however, expects key raw material prices to remain low in FY21 after a correction in FY20, contributing to a modest recovery in margins, stable working capital requirements and steady cash flows.
Ind-Ra expects cotton prices to stabilise with improved cotton supply and an inventory build-up in FY21. The industry adjusting to a low dealer inventory is becoming the new normal.
Easing of the GST implementation issues might only provide modest support to demand growth unless liquidity improves. Liquidity remains chocked with a lack of bank funding and sluggish end-consumer demand.
Ind-Ra said yarn production for FY21 is expected to remain muted with lack of visibility on wholesale demand. Sector consolidation will continue in FY21 while the mid and small commodity players continuing to struggle.
Ind-Ra expects stable cotton-polyester staple fibre (PSF) spread to encourage switching to PSF and hence underpin the man-made textile demand. The spreads would help in improving the competitiveness of the synthetic value chain and support its demand growth.
More From This Section
Globally, the consumption pattern remains skewed towards man-made textiles, contrary to domestic consumption. PSF prices will remain vulnerable to volatility in crude oil prices, should geopolitical factors creep-up.
Textile exporters are likely to witness reduced demand on the back of a weak Chinese demand accompanied by declined cost competitiveness, leading to lower production volumes in FY21.
Ind-Ra expects withdrawal of Merchandise Export from India Scheme (MEIS) incentive to affect export players of made-ups (home textiles) and garments.
Exporters are likely to remain uncompetitive against counterparts in Pakistan, Bangladesh, Turkey and Vietnam due to further delays in the implementation of rebate of state and Centre levy of Taxes. All these factors will lead to margin pressures for exporters in FY21.
Ind-Ra said it expects regulatory support in the form of GST refunds for spinning chains and availability of input tax credit from units operating in the unorganised sector or composition scheme to improve liquidity in the value chain.
Also, the abolition of uncompetitive purified terephthalic acid imports could prove a boon for the polyester value chain.
.