Nov 23, 2021
Strong demand to drive Indian textile sector’s recovery
Nov 23, 2021
India Ratings and Research (Ind-Ra) has maintained an improving outlook on the overall textile sector for the remainder of fiscal 2021-22 (FY22) on the back of the likelihood of a rise in revenue with improving operating margins due to continued strong demand, despite minor disruptions in the first quarter (Q1) of FY22 due to the second wave of COVID-19.
The domestic as well as export demand may sustain during the rest of FY22, leading to improved YoY sales volumes, the rating agency said in a media release.
Ind-Ra has maintained the rating Outlook at Stable for the reminder of FY22, expecting a sustained improvement in the sector players’ profitability and the continued deleveraging of their balance sheets. The strong operating cash flows will lead to an improvement in their credit metrics, despite the likely increase in the working capital requirement on the back of the higher sales volumes and increased capital expenditure.
The benefits of integrated business operations, healthy balance sheet liquidity and operating efficiencies over FY22 have already been factored into the ratings. Sector players in the ‘IND A’ and above rating categories have demonstrated resilience to COVID-19-led disruptions, given their adequate-to-superior liquidity profile. Ind-Ra-rated portfolio witnessed an improvement in both liquidity and credit metrics, supported by the strong operating cashflows in first half (H1) of FY22. The agency has changed the rating Outlook to Stable from Negative on the small and mid-sized commodity pure-plays, due to an expectation of a sustained recovery in demand and prices for FY22.
The domestic demand improved over second half (2H) FY21 before declining marginally during Q1 FY22, due to the closure of malls and retail spaces in cities. The demand is likely to improve from H2 FY22 with the easing of restrictions but remain vulnerable to any further restriction. Also, the demand from spinning mills seems to be recovering ahead of festivities in India. During Q1 FY22, players witnessed a rise in volumes YoY, although it declined marginally QoQ, according to Ind-Ra.
Segments such as cotton yarn and fabrics witnessed a higher YoY demand from downstream players during H1 FY22. The domestic demand for home textile has sustained, whereas that for woven fabric and apparel is likely to improve with the opening of retail shops and malls from H2 FY22.
Textile exporters in the cotton and yarn segment continued to witness an improvement in the export of yarn during H1 FY22 with cotton yarn volumes increasing by over 45 per cent during M4 FY22 over FY20 and FY21.
Ind-Ra expects export volumes to remain higher for FY22 over FY20 and FY21, owing to the increasing demand for Indian yarn. The export of fabric and apparel also recovered back to the pre-COVID levels during M4 FY21 and is likely to sustain with the unlocking of economic activities and the adoption of China Plus One strategy by importing countries.
Apparel and fabric exports during M4 FY21 were up 87 per cent and 108 per cent, respectively, on a YoY basis, due to the low base effect and reached pre-COVID levels. The agency expects the export demand to improve moderately in H2 FY22 due to accelerated vaccination and China Plus One sourcing strategy.
The demand is likely to improve further FY23 onwards. Furthermore, the ongoing impact of the sourcing restriction of China (Xinjiang) cotton, could play an important role in boosting the demand, the agency said.
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