Textile players to witness substantial fall in topline, operating profits: India Ratings

The textile players are expected to record a substantial fall in their topline and operating profits due to weak export as well as domestic demand in the first half of the financial year, India Ratings and Research (Ind-Ra) said on Wednesday. The continued lockdown in April 2020 (from late March) has impacted the entire textile industry and disrupted exports, Ind-Ra said in a report.
The export demand will be weak until H1 FY21, till the economic recovery of the US and Europe, which are the major hubs for Indian products, it added.
Further, the domestic demand as a discretionary product is expected to pick up gradually in Q2 FY21, but will be lower than a normal year demand, it said.
For FY21, the rating agency expects the textile players to record a substantial fall in their topline and operating profits.
The report said cotton prices continue their downward trend amid a declining demand and the spread of COVID-19, leading to lower consumption and thus disruptions in the global supply chain.
They fell by 2.3 percent month-on-month and 11.3 percent year-on-year in March 2020, on account of reduced offtake by mill owners which are facing the heat of production disruption and excess inventory amid the spread of the coronavirus.
However, Cotton Corporation of India continues to hold up the stock (30 percent of total arrivals) and may support the current prices over the short term.
The agency expects the prices in FY21 to correct by 5-10 percent, owing to a sharp fall in international cotton prices amid a reduction in the consumption levels by 6.4 percent for the current season.
The current global lockdown in major economies of the world has also led to a loss in the spinning capacities of three-and-half weeks or about 16 percent of the expected global capacities of March.
The pandemic situation is also impacting the supply chain of the cotton sector, it said, adding that while Chinese cotton mills’ spinning fell by up to 90 percent during the peak of crisis in early March, the recent resumption of spinning and manufacturing activities provides a hope of limiting the impact on the segment for the marketing year.
Meanwhile, with around 50 percent drop in the global oil prices in March-April 2020, companies in the man-made fibre segments are staring at inventory losses as there will be limited pricing power in the short-run.
The working capital cycle may remain stretched with an elongation of receivable cycle and higher inventory volumes, it added.
The operating profitability could be impacted by 25-30 percent in FY21 compared to last financial year due to lower gross margins and negative operating leverage.
Fabrics players witnessed lower production in March, on the back of a lower downstream demand and disruptions on account of the current crisis.
During the first 11 months of FY20, the production of knitted fabrics fell 1.2 per cent y-o-y, which is expected to decline substantially in FY21.
Manufacturers of apparels and ready-made garments have been grappling with a lower domestic demand and disruptions in the physical supply chain across the globe.
Spending on clothing is highly correlated to household incomes; with unemployment in the US rising at unprecedented rates, the agency expects a persistent weak consumer demand to impact downstream production.
Global retailers are responding to rapid declines in consumer spending by reducing and cancelling orders for textiles and apparels.
The agency expects exports from India to fall by at least a quarter in FY21 for the fourth consecutive year.
While major retailers have deferred orders or cancelled them, the need for innovation and ability to shift to new product lines would be the key monitorables.
The industry has witnessed players switching capacities to manufacture medical masks, personal protective equipment, wet wipes, and advanced textile fabrics to mitigate fixed costs and negate the reduced export demand, the report added.