APPAREL AND FABRIC INDUSTRY

India’s apparel exports not out of the woods yet, though the worst appears to be over

UPDATE: AUGUST 2018 ICRA RESEARCH SERVICES

CORPORATE RATINGS

Deep Inder Singh

+91 124 4545 830
deep.singh@icraindia.com

Nidhi Marwaha
+91 124 4545 337
nidhim@icraindia.com

Jayanta Roy
+91 33 7150 1100
jayanta@icraindia.com

ICRA RESEARCH SERVICES

 Contents: What’s Inside
❑ Industry ---------------------------------------------------------------------------------------------------------------------------------------------------------- ------------------------------------------------------8
Apparel
❑ Trend in global apparel trade
❑ Apparel imports of the US
❑ Apparel imports of the European Union
❑ Apparel exports of key exporting countries
❑ Share of key apparel exporting countries
❑ Share of key apparel importing countries
❑ India’s apparel exports
❑ India’s apparel exports to key importing regions
❑ Fiber-wise apparel exports of India
❑ Apparel export realizations of key exporting countries
❑ Financial performance of Indian apparel manufacturers

Fabric Industry --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------24

❑ India’s fabric production
❑ Fibre-wise fabric production
❑ Sector-wise fabric production
❑ India’s fabric exports and imports
❑ India’s fabric export destinations
❑ Fibre-wise fabric export mix
❑ Financial performance of Indian fabric manufacturers

Industry outlook---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- 32

ICRA ratings on the apparel and fabric industry------------------------------------------------------------------------------------------------------------------------------------------------34

Operational and financial comparison----------------------------------------------------------------------------------------------------------------------------------------------------------------------------- ------------36

Annexure I: Hike in import duty on textile imports -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------41

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 Contents: What’s Inside
❑
Company Section---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------44

❑ Arvee Denims and Exports Limited

❑ Arvind Limited
❑ BSL Limited
❑ Gokaldas Exports Limited
❑ Jindal Worldwide Limited
❑ Kewal Kiran Clothing Limited
❑ Kitex Garments Limited
❑ KG Denim Limited
❑ Loyal Textile Mills Limited
❑ Mafatlal Industries Limited
❑ Morarjee Textiles Limited
❑ Nandan Denim Limited
❑ Orbit Exports Limited
❑ Page Industries Limited
❑ Pearl Global Industries Limited
❑ Rupa & Company Limited
❑ Siyaram Silk Mills Limited
❑ Suryalakshmi Cotton Mills Limited
❑ Zodiac Clothing Company Limited

P A G E |3 ICRA RESEARCH SERVICES

 APPAREL AND FABRIC INDUSTRY
India’s apparel exports not out of the woods yet, though the worst appears to be over
Summary
Global apparel trade on a recovery
trajectory after three consecutive
years of subdued trends; estimated
to have touched an all-time high in
H1 CY2018
China continues to lose market
share in the global apparel trade;
though remains a distant leader
with a ~35% share
Given the underperformance vis-à-
vis global trends, India has
dropped back to the sixth position
amongst the largest apparel
exporting nations
P A G E |4
ICRA RESEARCH SERVICES
Apparel Manufacturing Sector
Global Apparel Trade: The global apparel trade is back on the growth trajectory with an estimated growth of ~4-5% year-on-year (YoY) in H1 CY2018
(refers to Calendar Year) and 2% in CY2017 in US$ terms, following contractions reported in CY2015 and CY2016. The positive trend is being led by the
strong recovery in apparel imports by the European Union (EU), which accounts for two-fifth of the global apparel trade (including the trade within
EU). Unlike the EU, apparel imports by the United States of America (US) remain muted, despite the trend being increasing during the past two years.
China – the world’s largest apparel manufacturer and exporter, continues to be challenged by rising production costs. It has, however, been able to
arrest the pace of decline in its apparel exports. Compared to the 9% de-growth in CY2016 and 7% de-growth in CY2015, its apparel exports
declined by just 1% each in CY2017 and Q1 CY2018. Nevertheless, a continued decline in China’s apparel exports, amid rising global apparel trade,
implies a further shrinkage in China’s share in the global apparel trade, even though it continues to lead with a 35% market share in H1 CY2018.
With China continuing to shed market share, Bangladesh and Vietnam remain the key gainers. Vietnam is maintaining a healthy growth in its
stronghold market of the US, with likelihood of its position strengthening further if the Comprehensive and Progressive Agreement for Trans-Pacific
Partnership (modified TPP) and EU-Vietnam Free Trade Agreement (FTA) are successfully consummated. Meanwhile, Bangladesh continues to gain
share in Europe, even as concerns on withdrawal of its duty-free access to the EU market have surfaced, given the improvement in its economic
indicators. India, on the other hand, is witnessing challenges in light of internal as well as external developments as explained below.
India’s apparel exports: In contrast to the increasing trend witnessed in the global apparel trade, India’s apparel exports have remained weak
during the past few quarters, primarily owing to an inexplicable decline in shipments to the United Arab Emirates (UAE, 17% share in India’s
apparel exports in FY2018). This is reflected in a YoY de-growth of 18% in Q1 FY2019 in US$ terms, following a decline of 20% and 12% YoY in Q3
FY2018 and Q4 FY2018 respectively. If the trade with UAE and Saudi Arabia is excluded, India’s apparel exports stood lower by only 1% in Q1
FY2019. While this provides some comfort, the situation remains unencouraging, when compared with a 4-5% growth in the global apparel trade.
Having said that, with the low-base effect setting in, the trend has moderated as reflected in a de-growth of only 1% in India’s total apparel exports
in July 2018. Nevertheless, FY2019 is expected to be the fourth consecutive weak year for India’s apparel exports following the 4% de-growth in
FY2018 and modest growth rates of 1% and 3% in FY2016 and FY2017 respectively.
ICRA notes that the Government’s accommodative stance, of reversing the reduction in export incentives, has provided some interim relief to
apparel exporters. However, the industry now faces concerns on continuance of export subsidy schemes in India, after being challenged by the US at
the World Trade Organisation (WTO). This seems to be constraining the growth momentum of India’s apparel export sector. Going forward, steps
taken by the Government to address these concerns, besides impending developments in the international trade including the modified TPP and the
EU-Vietnam FTA, remain crucial for the sector participants. Moreover, movement in Indian currency vis-à-vis currencies of competing nations will
determine relatively competitiveness of the Indian players. This is particularly critical considering the cost advantages in terms of lower labor and
financing cost that some of these nations enjoy.
ICRA RESEARCH SERVICES
 Summary: Continued…
Large apparel players continue to
grow at a reasonable pace while
maintaining profitability
P A G E |5
Financial performance of Indian apparel manufacturers (domestic-focused as well as exporters): Notwithstanding the pressures witnessed
owing to demonetisation and transition to GST, large apparel manufacturers have been able to tide over the challenges to a large extent. This is
reflected in a comfortable growth reported by them in recent quarters.
The aggregate revenues of 13 large, listed, garment-manufacturing companies in ICRA’s sample, grew by 10% (YoY) in Q1 FY2019 following the
similar average growth during the previous three quarters. During the past four quarters, aggregate operating margins of ICRA’s sample have also
remained range-bound at a healthy level. Compared to aggregate operating margins of 7-10% during the five-quarter period ending June 2017,
the operating margins have ranged between 10-11% since then. Supported by better margins, the aggregate interest cover for ICRA’s sample
recovered on YoY basis and stood at 4.4 times in Q1 FY2019 compared to 2.9 times in Q1 FY2018.
Although the margins remain better vis-a-vis last year, there has been a marginal sequential dip during the past two quarters, because of an
increase in price of the key raw material i.e. yarn, besides the inherent seasonality in revenues and profitability of some of the players in ICRA’s
sample. Earlier, the profitability during the period Mar’16-Jun’17 was impacted by larger discounted sales undertaken amid demand-side
pressures, and destocking by retailers prior to the shift to GST regime, besides firm raw material prices following the spurt in cotton prices in
FY2017.
Outlook:
Domestic-focused: A large population base, rising disposable incomes, and increasing share of organised retail present significant growth
opportunities for the domestic garmenting and retailing industry in the long term. However, the extent of growth for the domestic companies
will be partly determined by their competitiveness vis-a-vis the international suppliers and the level of imports in the country. Although on a low
base, apparel imports have increased by ~16% in the current year, highlighting a potential threat to the domestic industry. Having said that, large
garment manufactures would continue to benefit from the economies of scale in a fragmented industry, which would also enable them to cater
to the organised apparel sector, resulting in better realisations. Also, strong apparel brands would be in a better position to achieve growth in a
fragmented industry and command premium pricing.
Export-focused: While India has a large fibre base, the share of Indian garment exports has remained low at 3-4% in the global apparel trade.
Going forward, steps taken by the Government of India to address the concerns on continuance of export subsidy schemes, will remain crucial for
the Indian apparel exporters to capitalise on revived global apparel trade and loss of market share by China. Besides, the impending
developments in the international trade including the modified TPP and the EU-Vietnam FTA will remain key determinants of the opportunities
likely to be available to the Indian apparel exporters in the global market. Also, competitiveness of the Indian apparel exporters will remain
contingent upon the movement in foreign exchange rates. Nonetheless, fiscal incentives in the form of increased capital subsidy for capacity
additions under Amended Technology Upgradation Fund Scheme (A-TUFS) (from 15% to 25%) as well as several state textile policies, relaxed
labour norms, and sharing of the Employee Provident Fund (EPF) burden as introduced under the textile policy, augur well for the
competitiveness of Indian apparel exporters.
ICRA RESEARCH SERVICES
 Summary: Continued…
Fabric production recovers after
two years of subdued trend
Share of cotton fabrics is no
longer increasing as firm prices
constrain cotton’s
competitiveness
Spurt in fabric imports likely to be
arrested by recent hike in import
duty; trend in fabric exports
remains subdued
In contrast to industry production
trends, performance of large
fabric manufacturers remains
depressed
P A G E |6
Fabric Sector
Trend in fabric production: Indian weaving sector has faced multiple headwinds during the past few years. Besides demand-side pressures arising
from subdued exports of apparels and fabrics, the sector experienced challenges owing to demonetisation as well as transition to GST regime. The
headwinds because of demonetisation and transition to GST were particularly strong for the weaving segment as it is highly fragmented and
consisted primarily of the unorganised segment. Accordingly, India’s fabric production witnessed YoY decline in seven out of the twelve months
ending September 2017. However, the industry has subsequently reported a rebound in production levels as reflected in an 8% production growth
during H2 FY2018. In ICRA’s view, besides the low-base-effect, the sharp increase in production level can be partially attributed to suspected under-
reporting prevalent earlier and improved disclosures by the fabric manufacturers under the GST regime.
Given the sustained firmness in price of cotton vis-à-vis polyester staple fiber, the share of cotton fabrics declined marginally from 61% in FY2017 to
60% in FY2018, for the first time in last many years. The production of blended and 100% non-cotton fabrics increased by 3% and 12% respectively
compared to 3% growth in cotton fabrics in FY2018. Nevertheless, the share of cotton fabrics is likely to remain high, if not increase further,
because of abundant cotton availability in the country. Also, a shift in domestic demand towards premium apparel products, which are typically
made from cotton and blended fabric, is also likely to continue to support the growth in cotton fabric production over the longer term.
Fabric exports and imports: The Indian fabric industry continues to cater primarily to the domestic requirements with fabric exports (excluding the
supplies to apparel exporters) accounting for only ~6% of the domestic production as against a much higher proportion of exports in other
segments of the textile value chain like cotton yarn and apparels. Large domestic requirements, limited growth in production levels and low share of
high-quality fabric, given the fragmented nature of the industry and old vintage of the machinery, explain the continued low share of fabric exports
from India. Accordingly, despite a 5% growth in India’s total fabric production during FY2018, fabric exports increased by just 1%. Nevertheless,
despite the low share of fabric exports with respect to production, the share of the fabric segment in India’s total textile exports continues to be
higher at ~12%.
Similar to exports, India’s fabric imports also account for only 2% of the domestic production. Nevertheless, the industry has been challenged by a
spurt in fabric imports post the transition to the GST regime. The imports of cotton-based woven fabrics and man-made fiber based woven fabric
surged by 27% and 34% respectively during FY2018. This spurt was driven by shift in duty structure in favour of fabric imports. Thereafter, the
government has, however, taken a corrective measure, whereby import duty on key types of fabrics has been doubled to 20% in phases during the
current financial year. This measure is likely to curtail the fabric import levels.
Financial performance: In contrast to the industry production trends, the aggregate performance of 12 large fabric manufacturers in ICRA’s sample
has remained weak during the past seven quarters. While the trouble started with the demonetization drive in Q3 FY2017, the performance came
under further pressure during the transition to GST regime. Thereafter, while the overall fabric production in the country is reported to have grown at
a healthy pace, the aggregate revenues of ICRA’s sample remained flat in Q4 FY2018 before declining 4% YoY in Q1 FY2019. In fact, the aggregate
revenues in Q1 FY2019 were at same level as Q1 FY2016, despite the raw material prices being significantly (20%) higher. Hence, the implied sales
volumes of ICRA’s sample in Q1 FY2019 are estimated to have remained 10% lower than in Q1 FY2016.
ICRA RESEARCH SERVICES
 Summary: Continued…

The weakness in sales coupled with a surge in the cotton yarn prices over the past two quarters has brought the profitability of fabric
manufacturers under pressure. As a result, the aggregate operating margins of ICRA’s sample declined to 9.3% in Q4 FY2018 and further to 8.3%
in Q1 FY2019, compared to the level of 11-12% during the pre-demonetisation period.

Even though doubts on the production metrics reported by the sector remain, possibility of an inventory build-up cannot be ruled out given the
significant gap between industry-wide production trajectory and implied trend in sale volumes of ICRA’s sample. This could have in-turn
increased the dependence upon debt, in turn explaining the movement in interest cover which declined to 2.0 times in Q1 FY2019 from 2.6
times in Q4 FY2018 and 2.5 times in Q1 FY2018.

Outlook:
Fabric Sector: Notwithstanding the multiple challenges faced by the Indian weaving industry in the recent past, the growth in fabric demand
and hence production over the long term is expected to remain steady. This is expected to be driven by growth in the end -user industries of
apparels and home textiles, which in turn would stand to benefit from India’s large population base, rising disposable income s, increasing
share of organised retail and also the export opportunities. Within the highly fragmented weaving secto r, the players in the organised
segments are likely to outperform the overall growth in the sector. For the unorganised segment, the small scale and obsolesc ence of the
machinery remain the primary constraining factors which have impacted the productivity of the sector and quality of the fabric
manufactured. Modernisation and increase in the scale of operations would be critical to improve productivity, quality and co st
competitiveness of the domestic fabric, which, besides improving the direct fabric expor t opportunities, would also improve the availability
of quality fabric at competitive prices for the domestic consuming industries and help them increase their share in global exports.

P A G E |7 ICRA RESEARCH SERVICES


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P A G E |9 ICRA RESEARCH SERVICES