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2013 Outlook: Indian Textiles

Spinning Gradual Revival
Outlook Report
Rating Outlooks
Cotton

Rating Outlook
TO
Different Segments, Different Outlooks: India Ratings outlook for cotton textiles remains negative to stable for 2013 on account of subdued demand, although margins are expected to benefit from softening raw material prices. The outlook for synthetic textiles remains negative for 2013 due to reversal of substitution demand and oversupply in domestic partially oriented yarn, pressurising selling prices and margins of synthetic textile companies. Stable Cotton Prices: Muted international demand of cotton and surplus production are likely to keep cotton prices stable and range-bound during 2013. India Ratings expects cotton yarn manufacturers to benefit from slow but steady pick-up in domestic demand, the likely higher demand of cotton yarn from China and improving margins on account of low cotton prices and firm cotton yarn prices. Stability in cotton prices will enable spinning mills to better plan the inventory buying. However, spinners in Southern India and Gujarat continue to underutilise capacity due to power shortage or incur high cost of self-generated power. Exports Demand Sluggish: India Ratings expects garment exporters revenues to remain subdued on the back of the persistent economic slowdown in key export destinations of US and Europe and continuous deterioration in Indias competitiveness in apparel exports. However, to offset the impact, Indian exporters are diversifying into other geographies. Selling prices are likely to remain lower depending on companies bargaining power which is very low for small exporters or for low value added products (such as Rangoli International IND BB+). Existing Ratings Factor Risks: Around 88% of India Ratings-rated cotton textile companies have a Stable Outlook despite the industry outlook being negative to stable. This is because the agency has already factored into the ratings the weak credit quality marked by higher instances of near-full utilisation of working capital limits and negative operating cash flows. The same is true for 73% India Ratings-rated cotton textile companies with sub-investment grade ratings. Liquidity Concerns in Small Companies: Timing/efficiency of cotton buying, receivables and inventory management would continue to be key liquidity determinants in 2013. In 2012, India Ratings took negative rating actions on companies that overused their working-capital limits and/or delayed debt servicing due to liquidity stress. Leverage indicators are weak, yet better than 2008-2009 slowdown, when companies were in midst of capex cycle and high on debt.

NEGATIVE STABLE
Synthetic

NEGATIVE

Figure 1

Indian Textiles Ratings Outlooks

(%) 100 80 60 40 20 0 88

4 Positive Stable

8 Negative

Source: India Ratings

Related Research
Mid-year Outlook 2012: Indian Textiles (August 2012)

What Could Change the Outlook

Continued Stability: A stable outlook on cotton and synthetic textiles would require favourable policy environment, improvements in demand-supply position, continued stability in input costs and consequent improvement in margins/liquidity. It is unlikely that the sectors outlook will turn positive until fundamental issues such as power shortage, lack of technology and modern machinery and demand slowdown are resolved. However, foreign direct investment (FDI) in retail is an opportunity that would unleash demand in the long run and offset any slowdown in exports. Input Price, Inventory Risks: The cotton outlook could be revised to negative if input costs turn volatile, which could intensify inventory price risks, cash flows and liquidity. Given the sectors high debt dependence for operational as well as capex needs, any volatility in EBITDA could lead to huge swings in leverage.

Other Outlooks
www.indiaratings.co.in/outlooks

Analysts
Tanu Sharma +91 11 4356 7243 tanu.sharma@indiaratings.co.in Raghav Kapoor Prakash Choraria +91 33 4006 5816 prakash.choraria@indiaratings.co.in

www.indiaratings.co.in

24 January 2013

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Sub-Sector Outlooks
Figure 2

India Ratings: Credit Outlook by Segment

Value chain Spinners (cotton yarn) Spinners (synthetic yarn) Fabric players (cotton) Fabric players (synthetic) Apparel/made-ups manufacturers (cotton) Apparel/made-ups manufacturers (synthetic)
Source: India Ratings

Domestic Stable Negative Negative to Stable Negative to Stable Cautiously Stable Negative to Stable

Export Stable Negative Negative to Stable Negative Negative to Stable Negative

Demand pick-up in domestic segment; export demand sluggish

Key Issues
Demand Slowdown Persists
Garment exporters continue to face order slowdown with order sizes becoming smaller from existing clients in US and EU coupled with selling price pressure. To combat this, companies are venturing into newer markets such as Africa, Russia, Korea, Japan and Eastern EU. Demand is weakened further by tough competition from Asian peers such as China, Bangladesh and Vietnam who are lower cost manufacturers of apparel and also enjoy more favourable duty structure on exports. Domestically, weak consumer sentiment, high inflation and low wage growth have been dampening textiles and apparel sales. Discounts will be offered to encourage sales, but will keep margins under pressure.

Different Segments, Different Outlooks

Cotton yarn spinners outlook is stable as they are better positioned in terms of pick-up in demand with upcoming orders from China and lower cotton prices comforting their margins. Companies such as Sharmanji Yarns (IND BB+/Stable) are better positioned to weather cyclicality with flexibility to switch between cotton and synthetic yarn manufacturing. Production of cotton yarn increased by 13.9% yoy over April-November 2012. Synthetic yarn spinners have a negative outlook as lower demand and rising cost of inputs are squeezing their margins. Production of man-made filament yarn decreased by 0.2% yoy over April-November 2012 whereas production of blended and 100% non-cotton yarn grew at 0.1% yoy in the same period.
Margins improving on lower input costs, better yarn realisations

Fabric players outlook is negative to stable as fabric companies margins are on slower revival as labour, power and fuel costs are edging higher (around 15%-20% of total costs) offsetting input price decrease. Domestic cotton apparel makers are on cautiously stable outlook due to a fall in raw material prices and modest demand growth. Cotton apparel exporters are on a negative to stable outlook while synthetic textile exporters have a negative outlook. Exports of synthetic textiles decreased by 12.4% yoy over April-October 2012.

Input Price Risks

India Ratings expects cotton and cotton yarn prices to remain stable in 2013. As per The Cotton Corporation of India Ltd., cotton production in the current season (October 2012 to March 2013) is estimated at 35 million bales (1 bale=170 kg) while domestic consumption is expected at 27 million, leaving 7 million surplus. However, cotton prices have remained volatile in the last two years and any unexpected volatility could adversely impact textile companies. Related Criteria
Corporate Rating Methodology (September 2012)

After trending upwards over June-August 2012, raw cotton prices declined in September 2012 due to higherthan-expected domestic arrivals of cotton and higher imports of cotton by

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spinning mills, in anticipation of a lower harvest. Cotton yarn prices rose in H2FY12 on higher demand from spinners and greater exports to China. Fabric processing and garmenting are highly labour-intensive, and labour costs in India are rising. Therefore, setting up units or outsourcing work to third-parties in low-cost Indian regions or low-labour-cost countries such as Bangladesh could be instrumental in protecting margins. Power is an important cost component, particularly for spinning mills and fabric units that are more mechanised than garment units. Besides the element of cost, uninterrupted power supply is also important. Companies with captive power generation facilities are viewed favourably as they are self-sustained and more cost effective. Margins indication is more varied and dependent on company-specific strategies (backward integration, production diversification) to mitigate the margin weakness. High interest costs continue to impact net profitability and interest coverage.
Figure 3

Movement in Domestic Cotton Prices

(INR/kg) 125 J-34 (medium long staple) S-6 (long staple) Desi H4

110

95

80 Oct 11 Nov 11 Dec 11 Jan 12 Source: Cotton Corporation of India Feb 12 Mar 12 Apr 12 May 12 Jun 12 Jul 12 Aug 12 Sep 12

Figure 4

Movement in Textile Product Prices

(Wid avg. prices in INR/kg) 210 Cotton Hank Yarn Polyester Filament Yarn Polyester Staple Fibre Cotton Cone Yarn

160

110

60 2007-08 Source: India Ratings 2008-09 2009-10 2010-11 2011-12

Elongated Working Capital Cycles

Working capital requirements of companies which are backward integrating (Shahi Exports Private Limited; IND A-/Stable) are expected to increase. Another trend for exporters was increase in inventory days on account of samples for new product lines (Eastman Exporters Global Clothing Private Limited; IND A-/Stable; FY12: 132 days, FY11: 91 days). Surya Processors Private Limited (IND BB-/Positive) also continued to illustrate lengthy receivables and inventory period.

Tight Liquidity Position

Around 19% of total outstanding India Ratings-rated textile companies are rated in the IND D category, mainly on account of liquidity constraints, resulting in debt servicing delays and defaults. Companies are facing liquidity concerns due to delays in bank line enhancements and

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highly working capital intensive operations. Median interest coverage for textile companies rated in the IND B category is less than 2x indicating low cushion against any volatility in earnings.
Figure 5

Interest Coverage Ratios

Rating categories IND A IND BBB IND BB IND B and below
Source: India Ratings

Median op. EBITDAR/net fixed charges (x) >3 >2 >1.5 <1.5

Range of interest coverage over FY08-FY12 (x) 3 to 7 2 to 4 1.4 to 4 0.3 to 4

Debt Restructuring Scheme Ineffective

The INR350bn textile debt recast plan approved by the Reserve Bank of India (RBI) in 2012 has failed to gain traction as most of the stressed textile companies had already availed restructuring during the 2008-2009 slowdown, and the second round of restructuring would render their loans as non-performing assets (NPA). The NPA tag would deprive them of benefits under The Technology Upgradation Fund Scheme (TUFS) and push up their borrowing costs. Therefore, the scheme largely remained unutilised and textile companies opted for high-cost bank borrowings to maintain liquidity. The Indian banking system exposure to the textile sector was estimated at INR1,000bn as on 31 March 2012. Considering weak credit quality and rising proportion of the textile sector in non-performing assets, banks are cautious and stricter in lending norms to this sector.

More Policy Measures Required

Credit profiles of companies going for large debt-funded capex will remain subdued in 2013 given the input price risks and high borrowing costs. Completed capex resulting in scale benefits would lead to margin expansion. More policy measures are required to revive liquidity and growth in the backdrop of challenging textile industry operating environment since 2008.
Policy turning favourable; more measures required

To boost investments in the spinning segment, the Gujarat Government in September 2012 came up with The Gujarat Textile Policy (GTP) targeting installation of 2.5m spindles worth INR70bn over the next five years. RBI also extended the 2% interest subvention for exporters till 2014, which will aid liquidity. An additional 2% incentive is provided by the government for entities registering higher yoy exports. Other measures in the pipeline such as talks with Europe for zero import duty on Indian imports into EU could provide level playing field with countries such as Bangladesh in the long run. The government has allocated INR115.7bn for the TUFS scheme in the Twelfth Five Year Plan period (2012-2017). This is likely to encourage investments in the sector, especially in the areas of modernisation, spinning and processing capabilities as well as for entering new markets/products.

2012 Review
Stabile Margins: 2012 was marked by stability and restoration of operating margins for textile players across the value chain led by steady cotton prices, and the consequent positive impact on liquidity. Margins have been stable-to-improving, led by a better product mix, commanding higher margins in the case of Eastman Exports Global Clothing Private Limited (IND A/Stable).
Funds tied up in inventories

Flat Revenues: Demand remained sluggish across the value chain in 2012. For apparel exporters, order sizes reduced, hence volumes fell. However, rupee realisations increased partially due to rupee depreciation against the USD and Euro which resulted in moderate

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growth in revenues. Low Capex: Investment activity slowed down across the textile value chain in 2012 due to uncertain demand and volatile raw material prices which led to tying up of funds in inventories. Mid-Year Outlook Revision: The Outlook for synthetic textile companies was revised to negative from stable in August 2012 as crude-based raw material prices have increased on account of rupee depreciation (for further details, please refer 2012 Mid-Year Outlook: Indian Textiles report, dated 2 August 2012, available on www.indiaratings.co.in). Lower cotton prices and sluggish demand have reduced the substitution demand of synthetic fibres/textiles. Rating Actions: In 2012, India Ratings affirmed 20 textile companies, downgraded seven, upgraded two, and revised the Outlooks of two companies to Negative from Stable and of one company to Positive from Stable. Gayatri Suitings, a manufacturer of synthetic fibre and textiles, was downgraded to IND D from IND BB- on account of term loan defaults due to its stretched liquidity. The Outlook on Navnitlal Private Limited was revised to Negative from Stable, led by weakened interest coverage and deteriorating credit metrics due to raw material price volatility and slowing demand. Rupa & Company was upgraded from IND A- to IND A, driven by improvement in financial profile emanating from a superior product mix.

2013 Outlook: Indian Textiles January 2013

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Figure 6

India Ratings Public Textile Coverage (Excluding Suspended Ratings)

Long-Term Issuer rating Issuer Amaravathy Spinning Mills IND D B Sorabji Group IND B B.N.T. Connections Impex Ltd IND BB.N.T. Innovations Private Limited IND BBalkrishna Synthetics Limited IND BBBBallyfabs International Limited IND BBBBannari Amman Apparel Private Ltd IND B Bhadresh Trading Corporation Ltd IND BBBBhartiya International Limited IND ABlues Clothing Company Limited IND BB+ Chola Spinning Mills Private Limited IND BBBChowdary Spinners Limited IND B+ Classic Knits India Private Limited IND BBDattatreya Textiles Private Limited IND BBBEastman Exports Global Clothing Private Limited IND AEnn Tee International Private Limited IND B+ Gayatri Suitings Limited IND D Ginni Filaments Limited IND B+ Global Softech Limited IND D Gulabdas & Co's Hanumant Vanijya Private Limited IND D Hexa International Private Limited IND BBIndia Dyeing Mills Pvt. Ltd IND AIndian Acrylics Limited IND BB+ Indus Fila Limited IND D J.G. Hosiery Private Limited IND BBB JBF Industries Limited IND A Krishna Knitwear Technology Limited IND D Lambodhara Textiles Limited IND BB M C Spinners IND D Mahajan Fabrics Private Limited (MFPL) IND B+ Mainetti (India) Pvt Ltd IND BBB Mangla Apparels India Private Limited IND BB Maximum Synthetics Private Limited IND B+ Mountain Spinning Mills Limited IND B+ Mudra Lifestyle Limited IND D Nandan Exim Limited IND BBBNavnitlal Private Limited IND B Olive Tex Silk Mills Private Limited IND C Orient Fashion Exports (India) Private Limited IND BBBOswal Knit India Limited IND BBRangoli International Private Limited IND BB+ Riba Textiles Limited IND B Richa Industries Limited IND BB+ Rupa & Company IND A S. M. Apparels Private Limited IND D Shahi Exports Private Limited IND ASharmanji Yarns Private Limited IND BB+ Sri Ramnaryan Mills Limited IND B+ Strands Textile Mills Private Limited IND D Subh Laxmi Syntex Ltd IND BBSundaram Textiles IND BBBSunny Trexim Private Limited Surina Impex Private Limited IND B Surya Processors Private Limited IND BBThe Tuticorin Spinning Mills Limited IND B+ Topman Exports Limited IND BBTushar Fabrics Private Limited IND B+ Variety Prints Private Limited IND D Vijay Deep Silk Mills Private Limited IND BBWearit Global Limited IND BWelspun Global Brands Limited IND AWorldwide Tradelinks IND B Yashasvi Yarns Ltd IND BBSource: India Ratings

Ratings for short-term Rating outlook instruments IND D Stable IND A4 Stable IND A4 Stable IND A4 Negative IND A3 Stable IND A3 Stable IND A4 Stable IND A3 Stable IND A2+ Stable IND A4+ Stable IND A3 Stable IND A4 Stable IND A4+ Stable IND A3 Stable IND A2+ Stable IND A4 IND D Stable IND A4 IND D IND A4 IND D Stable IND A4+ Stable IND A2+ Stable IND A4+ Stable IND A3 Stable IND D Stable IND A4+ IND D Stable IND A4 Stable IND A3+ Stable IND A4+ Stable IND A4 Negative IND A4 IND D Stable IND A3 Negative IND A4 IND A4 Stable IND A3 Stable IND A4+ Stable IND A4+ Stable IND A4 Stable IND A4+ Stable IND A1 IND D Stable IND A2+ Stable IND A4+ Stable IND A4 IND D Stable IND A4+ Stable IND A3 IND A4 Positive IND A4 Positive IND A4+ Negative IND A4 Stable IND A4 Stable IND A4 IND D Stable IND A4+ Stable IND A4 Stable IND A2+ Stable IND A4 Stable IND A4+

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2013 Outlook: Indian Textiles January 2013