Get App
Textile exports are likely to witness downward pressure due to the macroeconomic headwinds in major export markets of India, especially European Union and the US, as discretionary spending is expected to further decline, according to India Ratings and Research (Ind-Ra). This is likely to affect India’s export volumes year-on-year, but the impact on India’s market share compared to other exporting countries shall be lower, given the China-Plus-One sourcing strategy being adopted by most importers and the ongoing geopolitical issues of other exporting countries.
Cotton Prices
Competitive cotton prices are important to India’s exports volumes and revenue and it will remain a key monitorable, according to Ind-Ra rating agency. Average domestic cotton prices corrected by over 25% in 2HFY23 compared to 1HFY23 with fresh cotton arrivals in the current season (October 2022-September 2023), but they remained higher than the pre-covid levels. Though cotton prices are less likely to increase in FY24 compared to the high prices in FY23, prices are expected to be strongly supported at current levels amid a domestic cotton shortage in current season.
The prices of cotton may increase further due to continued domestic demand growth and may also lead to incremental imports of cotton, given the low opening stock. The extent of domestic shortage and removal of import duty on the commodity shall be critical for India’s export competitiveness in 1HFY24. Ind-Ra expects cotton prices may correct moderately with new cotton arrivals in second half of FY24. Moreover, due to the US ban on the Chinese Xinjiang cotton, global cotton prices are likely to remain elevated over the medium term compared to pre-covid levels.
Demand Growth
Ind-Ra expects the demand momentum to be sustained continue in FY24 with negligible impact of COVID-19 and full-fledged operations of retail space malls, offices and schools. Furthermore, a large proportion of growth shall be driven by Tier-II and Tier-III cities with the accelerated development of smart cities, the rating agency added.
Ind-Ra stated that the central government has continued to support the textile industry to improve India’s export competitiveness over the medium term with various support measures under the new Foreign Trade Policy 2023 effective from 1 April 2023, Production-linked Incentive scheme for Man-made fibre and technical textiles segments, PM MITRA parks and FTAs among others. Free Trade Agreements have already concluded with UAE (May 2022) and Australia (December 2022) and are under negotiation with the UK, European Union and Canada.
Outlook
The rating agency said that it has a ‘Stable’ rating outlook for FY24, as the impact of lower export volumes could be partly offset by sustained domestic demand growth. Despite the likely moderation in realisations year-on-year, especially for cotton, Ebitda margins could improve on-year in FY24, helped by stable operations. This is in contrast to FY23 wherein moderated capacity utilisations led to lower fixed cost absorption and a sharp correction in raw material prices led to inventory losses in line with agency’s earlier estimates.
While a lower absolute Ebitda led to deterioration in credit metrics in 9MFY23, textile industry players maintain healthy liquidity, aided by strong credit profile and robust operating cash flows. The benefits of lower volatility in raw material prices and healthy balance sheet liquidity over FY24 have already been factored into the ratings.
Sector players in the ‘IND A’ and above rating categories have demonstrated resilience to disruptions, given their business profile strengths and adequate liquidity. Continued high capital expenditure by most textile companies is unlikely to have a credit impact as they had deleveraged in FY22.