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Aug 17, 2009
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Downside continues for Indian textile sector

By
Reuters
Published
Aug 17, 2009

Aug 17 - The credit quality of Indian textile companies weakened considerably since the beginning of the financial year 2009 (FY09), spurring rating actions ranging from Outlook revisions to multiple-notch downgrades according to a new report by Fitch Ratings. The agency notes the Indian textile sector remains highly vulnerable to the global recession due to its huge dependence on exports.



In FY09, soaring cotton prices and higher power costs, coupled with the appreciation of the rupee against the dollar made Indian exports less lucrative in the export markets. These factors coupled with mark-to-market and actual forex losses on forward contracts and exotic derivative transactions translated into negative results for many players, and EBITDA losses for some. Spinning mills and small-garments exporters showed the most vulnerability.

Fitch views that domestic demand remains resilient and registered a positive growth yoy, but notes an overall fall in margins.

Fitch believes that the earnings outlook for FY10 remains rather grim. Only temporary relief is expected from the fall in the rupee during H109, as forex movements have been persistently volatile warranting the benefit to be passed on to buyers in the highly-competitive export markets. Raw cotton prices are expected to remain firm, while the sub-normal monsoon could worsen the situation in the 2009-2010 cotton season. The man-made textiles (MMT) segment could again see an input cost pressure on the back of steadily rising crude oil prices. However, demand for MMT would not be adversely impacted on this account, as it provides a cheaper substitute to cotton in the mass clothing segment.

Fitch is concerned with the strained coverage ratios and peaking leverage indicators of textile companies. Though interest rates in general have come off the peak, debt repayments could weigh heavily on the contracting cash flows, increasing the default risk. Fitch believes that the textile sector requires an infusion of equity across the board given the relatively high financial leverage with which the sector has been operating over the past few years. Nevertheless, high leverage will continue to plague the sector, at least in the medium term, given the long-dated debt maturities of the TUFS (Technology Upgradation Fund Scheme) loans taken out for expanding and revamping of production facilities.

Recently, on 6 August 2009, the government announced the release of a INR25.5bn subsidy for the sector under TUFS to clear the backlog of pending disbursements up to 30 June 2009. This is expected to ease liquidity pressures, depending upon the actual funds tied up in TUFS by different companies.

Please refer to the comment titled "Downside Continues for Indian Textile Sector: Exporters' Credit Quality Impaired" available on our website www.fitchratings.com.

(This statement was released by the ratings agency)

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