The Indian textile and clothing sector (T&C) is undergoing a challenging phase, leading to weaker credit profiles, according to Fitch Ratings. Profitability has been hit by a number of factors: high cotton prices, inflation-led hikes in wages and other input costs, the higher cost of credit and forex losses.
Although revenue growth during the first half of FY09 (H109) was satisfactory for most of the companies rated by Fitch, the agency feels that this was mainly because of new capacity coming on stream and sales in anticipation of the peak season (October–December) in the domestic market. “However, margins have come under pressure primarily due to high input costs and higher overheads on the back of increased capacities,” the rating agency said.
Fitch has also seen increased pressure on the short-term liquidity of the industry led by increased working capital requirements and lengthening cash cycles. Fitch's demand outlook for the sector is cautious; and the agency expects the current scenario of slower demand to last at least until December 2009. With the recession in developed markets, it expects textile demand to remain muted, which will be reflected in the performance of T&C exporters.
The agency expects domestic demand to also come under pressure, as lower economic growth, low to moderate wage growth and Inflation put pressure on consumption expenditure. Although most India-focused T&C players have been impacted by the slowdown, the impact has been different across the value chain. “Companies with integrated facilities are partly protected from individual pressures in the value chain, as are companies whose expansion programmes have been completed and now have scale benefits. Companies at the lower end of the value chain, like small and mid–sized spinners, have been the hardest hit in this environment, and a number of them are expected to shut down production capacity,” it said.
Exporters are witnessing higher inventory build-ups compared with domestic companies due to delayed offtake from customers even with respect to confirmed orders. They also carry the added risk of bad debts which could have an adverse impact on their near-term liquidity.