Earnings and Ebitda margins of textile and apparel exporters will be hit in the near term following rupee's appreciation against the dollar in 2017 and weak apparel import from traditional markets like the US and the UK, Ind-Ra said today.
Ebitda margin -- earnings before interest, tax, depreciation and amortisation divided by total revenue -- is a gauge of a company's operating profitability.
A stronger rupee is likely to have an adverse impact on export trade volumes and earnings since fresh orders will have reduced competitiveness, India Ratings and Research said.
The rating agency estimates that realisations will shrink by 3-5 per cent in the near term and impact profitability of companies across the textile value chain. It expects the Ebitda margin erosion of around 150 basis points year-on-year in the fourth quarter ended March 2017.
It believes that this may offset some of the gains which will accrue from the government's export stimulus package, GST implementation and the US' exit from the Trans Pacific Partnership.
"The ongoing strength of the Indian rupee (INR) versus USD as reflected in the 3-month USD-INR futures trading at around 65.19 constrains the price competitiveness of the Indian textile exporters," it said.
However, Ind-Ra observed that apparel exporters' value- added garment mix, partially hedged forex exposure, debt- light structure and reasonable liquidity will support the overall business and financial risk profile.
Furthermore, strong domestic foothold of large spinners and weavers will mitigate any major impact on their business and credit risk profile, it said.
According to Ind-Ra, the unabated strengthening of the rupee vis a vis the dollar in the current calendar year has increased the challenges of the textile and apparel industry.
Although the easing of liquidity over February-March 2017 propelled a recovery in production output and export volumes, Ind-Ra believes that export realisations will be dented due to the strong rupee.
Over 70 per cent of India's textile and apparel exports are dollar denominated.
The rating and research agency noted that export-oriented apparel manufacturers with unhedged receivable positions will be hurt the most due to their geographically concentrated (US and Europe) earnings profile, low market share and restricted bargaining power with their global clients.
While domestic demand has recovered from the negative impact of demonetisation, strong cotton prices coupled with increased price competitiveness of imported yarn and fabric will pressurise margins, Ind-Ra said.
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