Indias cottons margin expansion will be led by lower cotton prices

India's cotton's margin expansion will be led by lower cotton prices

India Ratings and Research (Ind-Ra) has maintained a stable outlook for the country's cotton textiles sector in FY16/17 thanks to margin expansion led by lower cotton prices, but has warned of the risk of a potential price crash due to uncertainty in China. 

The ratings agency also suggests revenue growth will be slower, mirroring lower sales, and expects most of the revenue growth to come from higher production efficiency rather than significant capacity additions.

The cotton textiles sector, however, also faces key risks. A cotton/yarn price crash led by uncertainty on China's buying and stocking of cotton/yarn is a key risk, and could lead to a negative outlook revision for cotton textiles. Uncertainty stemming from China's policy and production strategy remains a threat.

For synthetic textiles, Ind-Ra continues to maintain a negative outlook for fiscal 2017 due to 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 is likely to be driven by the enhanced domestic consumption of fabrics, apparel and home textiles in view of lowering interest rates, rising discretionary income, favourable demographics and moderating inflation. The stressed rural economy will, however, be a dampener for demand. 

The value-added textile segment continues to witness stable demand, and Ind-Ra has maintained a 'Stable' rating outlook for textile companies as working capital optimisation and low capex will lead to debt containment. 

The ratings agency said it believes textile exports will be subdued over fiscal 2017 due to a slowdown in Chinese demand, the absence of free trade agreements with key end-markets like the US and Europe, and competitive pricing pressure. Yuan devaluation could emerge as a key concern for textile exporters as India and China both cater to these markets. India is likely to lose competitive advantage against peers such as Vietnam, which will benefit from duty-free access under the EU-Vietnam FTA, and possibly to the US upon the passage of Trans-Pacific Partnership (TPP).

The amended textile scheme ATUFS (Amended Technology Upgradation Fund Scheme) is likely to encourage fresh investments into the sector, but overall, prospects of a positive outlook are limited for fiscal 2017. Fundamental issues including taxation and duty structure in synthetic textiles, the need for modernisation in the weaving/processing sector, and expansion of scale, all need to be addressed in the long run the agency says.