Credit quality of Indian exporting companies impaired
The credit quality of Indian textile companies weakened considerably since the beginning of the financial year 2009 (FY09), spurring rating actions ranging from outlook revisions to multiple-notch downgrades according to a news report by Fitch Ratings.
The agency notes that the Indian textile sector remains highly vulnerable to global recession due to its huge dependence on exports.
In FY09, soaring cotton prices and higher power costs, coupled with the appreciation of the rupee against the dollar made Indian exports less lucrative in the export markets. These factors coupled with mark-to-market and actual forex losses on forward contracts and exotic derivative transactions translated into negative results for many players, and EBITDA losses for some. Spinning mills and small-garments exporters showed the most vulnerability. The report notes that domestic demand remains resilient and registered a positive growth year-on-year, but notes an overall fall in margins.
The report added that the earnings outlook for FY10 remains rather grim. Only temporary relief is expected from the fall in the rupee during H1’09, as forex movements have been persistently volatile warranting the benefit to be passed on to buyers in the highly-competitive export markets. Raw cotton prices are expected to remain firm while sub-normal monsoon could worsen the situation in 2009-2010 cotton season.
The man-made textiles (MMT) segment could again see an input cost pressure on the back of steadily rising crude oil prices. However, demand for MMT would not be adversely impacted on this account, as it provides a cheaper substitute to cotton in the mass clothing segment.
The report added, though interest rates in general have come off their peaks, debt repayments could weigh heavily on the contracting cash flows, increasing default risk. The report added that the textile sector requires an infusion of equity across the board given the relatively high financial leverage with which the sector has been operating over the past few years. Nevertheless, high leverage will continue to plague the sector, at least in the medium term, given the long-dated debt maturities of the TUFS (Technology Upgradation Fund Scheme) loans taken out for expanding and revamping of production facilities.
Recently, on August 6, the government announced the release of a Rs 2,500 crore subsidy to the sector under the TUFS to clear the backlog of pending disbursements up to June 30, 2009. This is expected to ease liquidity pressures, depending upon the actual funds tied up in TUFS by different companies.
