The pressure on textile exporters has become more severe with the strengthening of the Indian Rupee against currencies of key competing nations during the current calendar year, which reduced competitiveness of Indian exporters compared to their counterparts, credit-rating body ICRA noted.
The Indian textile exporters are facing difficult times since the past few months, which have led to constrained growth as well as pressures on profitability. Exporters have been facing subdued demand trends in the key importing countries as well as intense competitive pressures from nations such as Bangladesh and Vietnam over the past few years.
In addition, unfavourable currency movements and high raw material prices in the past six to nine months as well as recent revision in duty drawback rates have only added to their woes. With exports accounting for more than one-third of the Indian textile market, this is a matter of concern, notwithstanding a large domestic market.
The slowdown in the apparels segment has mainly been on account of subdued demand conditions in key textile-consuming regions of United States of America (US) and European Union (EU) which account for a majority of exports from India. This apart, cotton-yarn exports have been under pressure on account of a decline in demand from China, which used to account for more than 40 percent of total cotton yarn exports from India till last year and accounted for only 17 percent of India's cotton yarn exports in the first four months of FY2018.
India appears to be the worst-affected nation amongst cotton-yarn suppliers to China, as is evident in a decline in India's share in China's cotton yarn imports to 8 percent in Q1 FY2018, compared to 20 percent and 25 percent in Q1 FY2017 and Q1 FY2016 respectively.
"Notwithstanding the 2 percent depreciation in the Indian Rupee compared to USD in the month of September 2017, the Indian Rupee sustained its strong performance against currencies of most of the countries competing in the global textile space during much of the current calendar year," said Jayanta Roy, Senior Vice-President and Group Head, Corporate Sector Ratings, ICRA.
Further, higher input prices (primarily cotton) this year added to profitability pressures for exporters during H1 FY2018, given the cotton-dominance of textile exports from India. While cotton prices have corrected to an extent from mid-September 2017 onwards which is expected to provide respite during H2 FY2018, recent revision in duty drawback rates is likely to exert some pressure on margins.
The Government of India recently notified revised duty drawback rates under the Goods and Services Tax (GST) regime which are applicable to exporters with effect from October 2017 onwards. There is a downward revision in duty drawback rates for most product categories in the textile sector under the GST regime, when compared with duty drawback rates for exporters claiming Cenvat under the earlier tax regime.
"Considering that GST rates for most product categories in textiles are in line with effective tax rates under the earlier tax regime and the extent of benefit from improved input credit chain post GST implementation remains to be seen. The overall impact of GST and the revised duty drawback rates on the sector is uncertain at present." added Roy.
Notwithstanding the pressures being witnessed on profitability, debt levels across the sector are expected to decline with the industry focusing on sweating the existing assets and thereby undertaking limited debt-funded capacity additions. Further, with cotton prices easing out from mid-September 2017 onwards, profitability pressures are likely to subside from Q3 FY2018 onwards. As a result, ICRA projects the financial and credit risk profiles of most textile exporters to remain stable.
Disclaimer: No Business Standard Journalist was involved in creation of this content
