Ind-Ra: Textiles Companies' Credit Profile Likely to be Stable in FY17 despite Weak Operating Environment

India Ratings and Research (Ind-Ra) has maintained a stable outlook for cotton textiles for FY16-FY17. This will be led by a margin expansion in the cotton space on the back of lower cotton prices, even as revenue growth will be slower, mirroring lower sales realisations. Ind-Ra expects most of the revenue growth to come from higher production efficiency rather than significant capacity additions.

However, Ind-Ra continues to maintain a negative outlook on synthetic textiles for FY17 on continuing overcapacity, falling capacity utilisations, dumping from China, and continuously falling raw material prices (led by crude prices) which could translate into inventory losses.

 

Revenue growth in FY17 is likely to be driven by the enhanced domestic consumption of fabrics, apparels and home textiles in view of lowering interest rates, rising discretionary income (Ind-Ra's GDP growth projection for FY17 is 7.9%), favourable demographics and moderating inflation. The stressed rural economy is however a dampener for demand in FY17. The value-added textile segment continues to witness stable demand despite the macroeconomic data not seeming to be encouraging.

Ind-Ra has also maintained a Stable rating Outlook for textile companies, as working capital optimisation and low capex appetite will lead to debt containment. This combined with a margin improvement will drive the improvement in credit metrics in FY16-FY17, as reflected in the improved interest coverage ratio for listed textile companies in 1H16.

Ind-Ra believes that the export performance will be subdued over FY17 due to the Chinese demand slowdown, absence of free trade agreements with key end-markets of the US and Europe, and competitive pricing pressure. Yuan devaluation could emerge as a key concern for textile exporters as India and China cater to common large markets of the US and Europe. India is likely to lose competitive advantage against peers such as Vietnam, which has duty-free access to Europe, and possibly to the US upon the passage of trans-pacific partnership.

The amended textile scheme ATUFS (Amended Technology Upgradation Fund Scheme) is likely to encourage fresh investments into the sector which is sluggish at present, and this is positive for the existing projects which were awaiting the release of subsidy under the earlier versions. However, the total benefit to textile companies is likely to reduce due to the change in the nature and quantum of subsidy, and target segment for benefits under the scheme. Also, the possibility of large-scale greenfield capex remains low in FY17.

OUTLOOK SENSITIVITIES

Prospects of a positive outlook are limited for FY17. Fundamental issues of taxation and duty structure in synthetic textiles, need for modernisation in the weaving/processing sector, and expansion of scale need to be addressed in the long run.

Global factors: A cotton/yarn price crash led by uncertainty from China on buying/stocking of cotton/yarn is a key risk, and could lead the outlook revision to negative for cotton textiles. Uncertainty stemming from China's policy and production strategy remains a threat.

Stability in crude oil prices is critical for a revision of the outlook on synthetic textiles to stable.

Demand Drivers: Recovery of export demand and sustenance of domestic demand are key sensitivities for textile and apparels.

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