Tell about Textiles Companies ?

While competition is relatively lower in the domestic apparel fabric market (due to high degree of sophistication required in designing and finishing), the market for export of home textile is very favourable for Indian players, with most of the European companies having gone into bankruptcy.

Also, while the apparel segment enjoys higher margins (as compared to home textiles), the home textile division is a hedge against changing fashion trends in the apparel segment. The two business models thus, offer diversification in terms of products, customers, fashion cycles and currency risks.

The cyclicality in the textile business is closely linked to the discretionary income in the hands of people, in other words - the buoyancy in the economy.

However, here one needs to note that with the global markets now being accessible, the industry slowdown related risks in the domestic economy remains limited

We therefore enlist some of the key demand and supply drivers taking into consideration the dynamics of the global textile markets.

Demand drivers: The global textile industry is valued at US$ 440 bn.

US and European markets dominate the global textile trade accounting for 64% of apparel and 39% of textile fabrics market.

With the dismantling of quotas, global textile trade is expected to grow (as per Mc Kinsey estimates) to US$ 650 bn by 2010 (5 year CAGR of 10%). Although China is likely to become the 'supplier of choice', other low cost producers like India would also benefit as the overseas importers would try to mitigate their risk of sourcing from only one country.

India's textile export (at US$ 15 bn in 2005) is expected to grow to US$ 40 bn, capturing a market share of close to 8% by 2010.

India, in particular, is likely to benefit from the rising demand in the home textiles and readymade apparels segment, wherein it has competitive edge against its neighbours. Nonetheless, a rapid slowdown in the denim cycle poses risks to fabric players.

Supply drivers: India is the third largest producer of cotton in the world after China and US and has the largest area under cultivation.

Cotton, a key raw material in the textile and garment industry, accounts for about 30% of the fabric cost and 13% of the garment cost.

India has an abundant supply of locally grown long staple cotton, which lends it a cost advantage in the home textile and apparels segments.

India also enjoys a significant lead in terms of labour cost per hour (US$ 0.6 in 2004), over developed countries like US (US$ 15.1) and newly industrialised economies like Hong Kong (US$ 5.1), Taiwan (US$ 7.1), South Korea (US$ 5.7) and China (US$ 0.9).

Also, India is rich in traditional workers adept at value-adding tasks, which could give Indian companies significant margin advantage.

Demand slowdown: Although the domestic demand for textile remains robust, the same is not true for the branded garment segment. Therefore, manufacturers largely rely on the overseas markets for vending their products

Of this, the US and the EU consume nearly 90% of exports. For home textile companies, the domestic market being dominated by unorganised players, nearly 90% of the produce is exported.

However, with the US and the EU economies now showing signs of slowdown, the same will inevitably have an impact on the incremental demand. Key ratio - Exports / Total turnover

Exchange rate risks: Given the volatility of the rupee against foreign currencies (especially against the US dollar), the exposure to the overseas markets renders the textile companies to significant foreign exchange risks.

Although most textile companies have some hedging mechanisms (example, forward bookings) in place, an unexpected movement in the rupee can obliterate such efforts. Key ratio - Forex loss / Operating expenses

Rise is interest rates at a time when most textile companies are heavily leveraged due to the ensuing or ongoing capex plans is bound to pressurise their interest coverage ratios.

In fact, this is the time that will test whether the companies have taken cognizance of the lessons learnt during the previous interest rate cycle.

Nevertheless, companies that have already taken advantage of the TUF (Technology Upgradation Fund, offering loans at 6% subsidy - proposed to expire in March 2012) to fund their capex are, however, better off than their peers. Key ratios - Debt /Equity, Interest cover

Overcapacity: Companies in the apparel and home textile segments alike have huge capacities coming up in the near term.

However, the underutilisation of these capacities, led by flagging demand, may deny any operating leverage, thus forcing them to compromise on their operating margins.