Mar 10, 2017
Outlook for cotton textiles to be stable in FY18
Mar 10, 2017
The outlook for cotton textiles has been revised to stable for FY18 from negative in FY17 by credit rating agency India Ratings and Research (Ind-Ra). It has also revised its outlook for synthetic textiles to stable for FY18 from negative for FY17. This revision is due to stable input prices, healthy capacity utilisation and steady domestic demand scenario.
Support emanating through fiscal incentives and implementation of Goods and Services Tax (GST) that will improve the textile industry's export competitiveness is also a factor for the stable outlook.
Moreover, the US's exit from the Trans-Pacific Partnership is likely to realign textile trade and investments towards the Indian subcontinent that were diverted to Vietnam over FY16-FY17.
The stable cotton outlook is in view of an increase in acreage, a rise in supply in 1QFY18 (due to demonetisation) and a decline in global inventory assisting with a balanced supply. Ind-Ra expects operating profitability levels of Indian cotton ginners and exporters to moderate in FY18.
Liquidity position of small players was acutely affected due to a surge in cotton prices in 1HFY17, followed by a challenging operating environment in 2HFY17 due to demonetisation.
Ind-Ra expects cotton acreage to increase 10-15 per cent to nearly 120 million hectares in FY18, leading to increased production. The agency projects a domestic stock-to-use ratio of nearly 13 per cent for cotton marketing year (MY) 17-18.
A unified tax structure in the form of GST is likely to create a level playing field for the cotton and polyester industries, and promote enhanced sponsor interest towards the polyester chain.
Ind-Ra opines that textile companies would be able to deleverage their balance sheets in FY18 in the absence of major investments due to adequate capacities and pending uncertainty over the GST tax rates. The next round of investment cycle is expected from FY19.
Favourable trade agreements with the US and Europe will lead to a significant increase in India's textile exports and a higher-than-expected domestic demand would be positive for the sector outlook.
However, slowdown in demand emanating from weak domestic spending in or protectionist trade policies by the US or Europe leading to under utilisation of capacities, and high volatility in input prices adversely impacting contribution margins could lead to revision of the textile sector outlook to negative.
A substantial increase in domestic mill cotton consumption, driven by a rise in demand for Indian textiles on account of higher domestic consumption and exports will lead to a revision in cotton sector outlook to positive.
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