Indian Textiles Sector: Weaving A New Growth Story

After remaining in slumber for the last few quarters, the Indian textile industry is set to spring a Rip Van Winkle on us. This is thanks to some of the factors that are serving as tailwinds for the resurgence of the sector.

Important among them is the growth in the global economy, especially in the US and Europe, which import a major portion of our textiles. Although the sharp rupee depreciation has created some macro-economic problems for India, it has gone well with the textile companies, boosting their competitiveness globally. Even cotton, a key raw material for the sector, will help these companies. Last but not the least, active support from the government in the form of the Technology Upgradation Fund Scheme (TUFs), Integrated Textile Parks and the opening up of 100 per cent FDI will add vigour to the sector. And an improvement in the sector, in turn, will definitely help the Indian economy.

The sector remains one of the cores of the Indian economy. According to the Ministry of Textiles, textile exports bring in 11 per cent to the country’s total exports, making it an important contributor to India’s foreign exchange. The industry accounts for 14 per cent of the country’s industrial production and four per cent of the GDP, and employs 45 million people. According to the World Trade Organization, India was the third largest textile exporter and the fifth largest clothing exporter in the world by 2011.

Global Economic Growth To Boost Exports

India's textiles products are exported to over a hundred countries, but the USA and EU make up the largest chunk (two-thirds) of the textile exports pie. Following the sovereign debt crisis in the US economy, textiles exports in FY13 shrunk by 4.82 per cent in dollar terms. Of course, INR depreciation meant an 8.10 per cent growth in rupee terms. The EU textiles markets shrank by 13 per cent in 2012, which also impacted the Indian textiles exports.

Following the troubled year witnessed earlier, the Euro zone and US economy have been showing a good recovery. The US economy has, in fact, witnessed a rise in its GDP on a year-on-year basis. The macroeconomic data also suggests that both services and manufacturing sectors are expanding there. 

The European economy has also shown early signs of coming out of the woods. The European Central Bank has raised the GDP estimate for the second quarter of 2013 to 0.3 per cent against a 0.1 per cent shrinkage in the March quarter. Business confidence as well as consumer confidence has started rising on the continent, suggesting that spending in Europe would rise. This would benefit all the countries which export textiles to the region. 

One also should not ignore the higher prices of cotton in China (read more on this in the following paragraphs), which also has a positive impact on the Indian textile industry as Chinese companies are importing yarn from their Indian counterparts. For example, Vardhman Textiles reported 24 per cent growth in its yarns business as the demand mostly came from China. 

The safety issues in Bangladesh and soaring costs in China are proving to be positives for India. To take another instance, Alok Industries reported 33 per cent growth in textile exports in FY13. In the first quarter of FY14, this company reported a decline in the receivables outstanding from its international customers, which means that the credit profile of the textile importers has been improving. This means that textile importers would create a higher demand, which would spell straightforward benefits for the Indian manufacturers. 

Buoyed by higher demand from the export market, Indian textile exports are expected to growth at a rate of 15 per cent in this fiscal. The government has also increased the annual export target from USD 36 billion to USD 43 billion. India’s textile exports rose from 10.57 per cent of total exports at the end of Q1FY13 to 10.78 per cent at the end of Q1FY14. which also supports our argument. To benefit from this, industry leaders such as Alok Industries and Vardhman Group have envisaged adding new capacities to tap this export demand.
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Depreciating Rupee To Help Increase Textile Exports

The other big factor that is playing a dominant role in the resurgence of the textile sector is the sharp drop in the value of the Indian rupee (INR). Year-till-date, the INR has depreciated by more than 15 per cent against the US dollar.

However, it’s not only the INR depreciation in isolation against the USD that will help the industry. Rather, it is the relative depreciation of the INR against some of the major competing currencies that will increase the competitiveness of the Indian textile companies.

China, which commands more than 30 per cent market share in the global textile and clothing trade worth around USD 800 billion, is a good example where India will reap the benefits of currency depreciation. For example, the INR has depreciated by more than 20 per cent against the USD in the last one year, whereas the Chinese Yuan (CNY) has depreciated by just 3.4 per cent against the USD in the same period. In effect, the INR has depreciated by 17 per cent against the CNY.

The rupee has not only lost value against the yuan but also in comparison with the currencies of a host of other key competitors like the Pakistani Rupee and Bangladeshi Taka. Such relative depreciation will help the Indian textile companies to become more competitive in the export market and gives us a good opportunity to increase our market share in this industry globally, which currently stands below five per cent.

The first quarter of the current fiscal gave some indication that we are getting the benefit of the fall in the rupee, as textile exports increased, albeit marginally by 0.3 per cent. Nonetheless, this rise has come against the backdrop of the three per cent fall in textile exports last year. Moreover, the INR had depreciated by just five per cent in the first quarter of FY14 and the major dip in its value came after June 2013. Therefore, we are likely to see the full impact of rupee depreciation in the coming quarters.

Cotton: Lightening The Financials

Apart from the rupee, cotton (one of the key raw materials used in the textile industry) is playing an important part in ‘baling’ out the Indian textile industry. Out of the total textile exports from India, apparel and cotton textile products together constitute 74 per cent.

FY14 will be the fourth consecutive year when global cotton production is expected to surpass consumption. According to the US Department of Agriculture, cotton inventories are expected at a record nearly 94 million bales in the FY14 cotton season, nine per cent higher than the FY13 levels.

Nonetheless, higher inventories do not always mean lower prices. There are also other factors that come into play. In case of cotton prices, it is China’s cotton policies that have an overarching influence on the global prices. China, which currently holds 58 per cent of the global stock, is expected to move up to 62 per cent by the next cotton season. One of the reasons why cotton inventories are at such a high level in China is that the government supports its farmers with higher prices compared to the global prices. This price differential resulted in a lot of imports by China in the last two years apart from the domestic purchases.

Nevertheless, China has indicated that its cotton policy will be revised before the arrival of the FY15 crop, as the current stock buildup is not sustainable. This will lead to a correction in cotton prices in two ways. First, the downward price revision in China will pull down the prices. Secondly, lower demand from China will lead to lower cotton prices. Domestic cotton prices mimic those across the globe, and looking at the inventory glut, Indian cotton prices are expected to remain under pressure.

A good monsoon seen this year and an expected abundant crop will be additional factors keeping the prices under control. High cotton inventory along with relative depreciation of the INR compared to other textile and clothing-exporting countries will help Indian firms to reap benefits on all fronts, with competitive positioning in yarn, fabric as well as apparel exports.
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Government Policies To Support The Sector

To boost textile exports further, the 12th Five Year Plan has envisaged exporting textiles and clothing of USD 64.41 billion by the end of FY17. This would be more than double the value of textiles exported by India in FY12.

This sector has always been on the list of the government when it comes to extending support. The main reasons for this are that it remains one of the key foreign exchange earners and is also a mass employment generator.

There are a whole range of measures that the government has extended towards the betterment of the sector. Principal among these is the Technology Upgradation Fund Scheme (TUFS). On August 29, 2013, the Cabinet Committee on Economic Affairs gave its approval for continuing with TUFS during the 12th Plan period, with a major focus on power looms in accordance with the Budget announcement for FY14.

The total budget outlay for continuation of the scheme will be about Rs 11900 crore, of which Rs 2400 crore has been allocated for the 2013-14 fiscal. This will provide plan support for modernisation of the industry in the form of interest reimbursement and capital subsidy.

The sectors that will benefit from TUFS are spinning, weaving, processing, technical textiles, jute, silk, garmenting, cotton ginning, wool and power looms. It is estimated that since the launch of the scheme in 1999, it has helped to garner investments worth around Rs 2.5 lakh crore in the sector so far.

The other point is the strong leg up that Foreign Direct Investment (FDI) is expected to lend the sector. The Indian government has allowed 100 per cent FDI in the textile sector under the automatic route. FDI to the extent permitted under the automatic route does not require any prior approval either by the Government of India or by the Reserve Bank of India (RBI). Investors are only required to notify the concerned Regional Office of the RBI within 30 days of receipt of inward remittance. Market experts are looking forward to an increase in FDI for the sector by five-seven per cent in this fiscal.

Another factor is the Scheme for Integrated Textile Parks (SITP), 2005. The scheme was introduced to neutralise the weaknesses of fragmentation in the various sub-segments of the textile value chain and the unavailability of quality infrastructure. This is a part of the National Textile Policy, 2000, which was introduced for the overall development of the industry.

There are 61 sanctioned textile parks as of date. Of these, 40 projects were started in the 11th Plan and another 21 are to be implemented in the 12th Plan. Among the 40 parks sanctioned earlier, 25 are operational and the rest are expected to be completed during this financial year. These parks are expected to generate over 10 lakh jobs and investment worth of Rs 28000 crore.

Who Will Benefit? Companies & Investors

While the cumulative effect of all these factors will help the sector as a whole, some companies will benefit more. In the current scenario, we believe that Vardhman Textiles and Page Industries are two companies that can form a part of investors’ portfolio. Read on to find out more about these.
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Vardhman Textiles

Vardhman Textiles (VTL) is a large textile conglomerate with a presence across the textiles value chain. VTL and its subsidiaries have 20 manufacturing facilities across India, with the largest spinning capacity in the country (960000 spindles, including 4488 rotors). It exports (around 41 per cent of revenues) its products to more than 25 countries and has a strong presence in markets like the EEC, USA, Canada, China and Japan.

We feel that the depreciating rupee would provide a good amount of impetus to this company’s exports. The best part is that its sales to foreign clients have grown on a consistent basis.

On the valuations front too, it is trading at just 6x its trailing four quarter earnings. We recommend a ‘buy’ on this counter with a target price of Rs 400.

Page Industries

Page Industries is the authorised franchisee of the global brand Jockey. The brand name itself is so powerful that nary a word needs to be said about the company itself. Page Industries makes variety of innerwear and sportswear for men, women and children. Besides Jockey, the company also has another brand, i.e. Speedo.

Page Industries has a fairly simple business model, which is one of major reasons behind its success. The main theme behind the growth of the company is the rising awareness regarding branded apparel in the country. The brand Jockey has achieved a high degree of penetration, with exclusive stores not only in the top cities but making a mark even in the rural parts of the country. The company is now opening its stores in Tier II and Tier III cities, which will further increase the exposure of the brands and will thereby impact its business positively. The company is also expanding its manufacturing capacity to handle the higher demand for its products.

The stock has been among the consistent performers on the bourses. Its return ratios are also steadily above 50 per cent, which makes a very strong case to have this stock in your kitty.