Cotton spinners' EBITDA margins, which were hurt by inventory valuation losses on a 20% decline in cotton prices in FY15, could recover in FY16 in the range of 10%-13%. However, it would still remain lower than the FY14 levels (14%-16%) which benefitted due to exceptionally high Chinese demand.
Ind-Ra has revised the outlook for the synthetic textile sector to negative for FY16 from 'negative to stable'. Unfavourable cotton-polyester staple fibre spreads have hurt substitution demand for synthetic fibres and synthetic yarn. Lower export competitiveness of Indian synthetic yarn also contributes to the subdued outlook as import and central excise duty continue on man-made fibres. Oversupply of cotton and cotton yarn over FY16 coupled with lower average crude prices could also cause the price of polyester fibres to decline. Ind-Ra expects contribution margins for polyester yarn to remain downcast in FY16. Margins for texturised yarns and fully drawn yarns are likely to be partly insulated due to higher value addition.
Apparel exports could continue to show a positive growth trend in FY16, driven by the improving economic outlook of buyer countries. India has gained out of higher wages, political instability and work place accidents in other apparel exporting nations. Although India has a small share in the global textile trade, it is well positioned to gain from weak input prices and growing demand for apparels and made-ups. The trends, if sustained in FY16, are likely to improve the financial metrics of garment manufacturers.
Growth of garment manufacturers might remain largely volume led while realisations could continue to exhibit commodity and competitive pricing pressure. Companies with diversification in higher value-added products are likely to benefit from the tailwinds of input price reduction. However, commoditised products will see a pass through, and not any margin expansion.
The agency has maintained a Stable Outlook on its rated textile companies as they are likely to show ratings stability on growing domestic demand, competitiveness in apparel exports and an overall improvement in credit profile (i.e. lower gearing and leverage). Trends for FY16 in the textile sector indicate more cautious inventory management, risk aversion towards holding higher raw material stocks and focus on efficiencies in cash conversion cycle.
OUTLOOK SENSITIVITIES
The sector outlook for cotton textiles will be revised to negative if margins and cash flows come under pressure on account of volatility in cotton prices and inventory losses. Stability of cotton prices depends upon global factors such as China's strategy on releasing its cotton inventories and domestic factors such as cotton production and inventory policy of government procurement agencies. Similarly, an improvement in the realisations of man-made yarn, and consequently margins would lead to a revision in the outlook to stable for the synthetic textile sector.
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