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Sowmya Sundar

DRIVEN by the gradually improving demand, the textile machinery industry is finally showing signs of a recovery after an almost-decade-long recession.

The removal of quota restrictions on textiles in 2005, which would expose the textile industry to the free trade regime and force it to expand and modernise rapidly, is a ray of hope for the machinery industry.

Window of quota removal

Any factor that would trigger investment in the textile industry would also set off growth in the machinery sector. In the wake of the dismantling of the quota regime, the textile industry is set for a sea change in its operational and business environment.

This is significant as textiles are already the largest export earner, contributing close to 30 per cent of the country's export earnings. The hastening process of reforms in the textile sector and the measures to induce fresh investment augur well for the machinery sector.

The removal of quota on textiles under the WTO agreement by end-2004 would expose Indian textile units to the vagaries of the global market. To compete in an unprotected global environment, the industry will have to make quality and cost-effective products.

Given the outdated production capacities, the textile industry would be able to meet global standards, and produce cost effective products, only if it modernises its capacities, and invests in replacement and expansion.

The need for modernisation could throw up a huge opportunity for domestic machinery manufacturers.

According to the report on investment and growth in the textile industry commissioned under the chairmanship of Mr N. K. Singh, Member, Planning Commission, an investment of Rs 98,550 crore is required to modernise the industry. Even if a fraction of it translates into actual investment, the textile machinery industry may be in for better times.

But all is not hunky dory for the textile machinery industry and its user segment. The industry has to face a number of challenges before the opportunity translates into orders.

Cash strapped user industry

The user industry is burdened by overcapacity acquired through high-cost borrowing. The long anticipated textile debt-restructuring scheme announced by the Government is expected to provide some breather to textile units suffocating in a debt burden. Textile units would be able to swap their high cost debt costing 15-17 per cent with low cost debt at 8-9 per cent.

Moreover, the conversion of the accumulated interest liability into zero coupon bonds to be paid after five years would give the units some time to recoup and save cash generated from operations. The free cash generated could, in turn, be channelled into investments.

However, the package is available only to units that fulfil certain conditions such as technical viabilityand a positive operating profit in three out of the five previous years. Given the experience with the earlier scheme, the Technology Upgradation Fund (TUF), which was set up four years back to provide concessional funds to the textile industry to modernise its capacity, it could be a long wait for the machinery manufacturers. The fund was a major failure, with the offtake under the scheme being just Rs 4,200 crore against the original target of Rs 25,000 crore.

The unwillingness of the financial institutions to support units with shaky financials and stringent conditions for grant of funds resulted in the failure of the scheme. History can repeat itself with the new relief package too. The hurdles in the actual implementation of the scheme might impede the pace of growth for textile machinery manufacturers.

Weakened by recession

Assuming the textile industry takes advantage of the relief package to modernize its capacities, the domestic machinery manufacturers might not be able to take full advantage of the opportunity as a number of them are in a poor financial state and lack upgraded capacities.

Sliding demand over the last 6-7 years has done enough damage to the financials of the industry players. Expansion plans undertaken a decade earlier with borrowed money have left them with unutilised capacities and a huge-and-high-cost debt burden. Twenty units have shut shop, unable to continue production because of liquidity problems. The onslaught of imported machinery and the burden of high-cost debt have taken a toll on the industry.

The lower demand forced few companies to phase out some of their products. Several have reduced staff and brought down the number of shifts for want of orders. A few have been referred to the BIFR.

Under these circumstances, the domestic companies, barring a few may not be able to take full advantage of the opportunity unless they are given some relief on the debt front.

Low level of R&D

Decline in demand and huge interest costs left very little cash for research and development (R&D) and technology upgradation. Hence, the industry is saddled with obsolete capacities. The industry's plea to the Government to allot Rs 1,500 crore for the textile machinery sector under the TUF scheme on similar lines as that proposed for the textile industry has not been accepted so far.

The industry has just taken a step towards improving R&D by setting up a Textile Machinery Research and Development Centre. However, the project, which envisages an investment of Rs 50 crore, is yet to receive complete funding. The industry has agreed to fund only 40 per cent of the project cost. The rest should come either from the Government or through technological collaborations. Given the cash constraints for R&D, not all companies would be able to cater to the demand even if there is an upswing.

Imports that stifle

Statistics for the past five years reveal that the imports have been increasing consistently, garnering a bigger share of the Indian market. Imports contribute 64 per cent of the total demand. Production for the domestic market (domestic production less exports) has fallen by 40 per cent since the boom period of 1994-95. Overall demand has declined by 11 per cent as compared to 1997-98.

Low capacity utilisation, high financial costs and skewed duty structure make indigenous machinery more expensive than imported ones. For long, the skewed duty structure has affected the domestic players. Though the structure has been altered over a period, it is still not completely in the favour of the domestic industry. For instance, both complete machinery and components are allowed at a basic Customs duty of 25 per cent.

The domestic players have a high import content, which increases their cost of production and affects their competitiveness vis-à-vis finished machinery imports. Hence, the possibility of cheap imported machinery garnering a larger share of the modernisation pie cannot be ruled out.

Key to revival

The revival of the industry hinges on a slew of corrective measures, including a debt-restructuring package for the industry and a level-playing field for Indian manufacturers.

A revival package similar to that granted for the textile industry could help the industry restructure its debt and reduce interest costs. It would enable the industry to come out of the vicious circle and become financially viable. The improving demand conditions could then improve capacity utilisation and generate higher revenues and cash flows, which could be re-invested in product innovation and technology upgradation.

Under the current circumstances, only a few, such as LMW and Veejay Lakshmi, are financially better off to be able to reap the benefits. These can be tracked for potential investment (see accompanying story). A level-playing field in terms of lower Customs duty on parts rather than on finished machines could improve the chances of the domestic players securing a fair portion of the prospective modernisation pie.

Even as demand shows signs of picking up, the textile machinery industry would need key policy measures from the Government quickly to get itself back on the sustained growth path.

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