Outlook for cotton textiles negative-to-stable: India Ratings

This year’s outlook for the Indian cotton textiles is “negative-to-stable” due to subdued demand, though margins are likely to benefit from softening of raw material prices, India Ratings has said in a report. The outlook for synthetic textiles, however, remains negative, it said.

“The outlook for cotton textiles remains negative-to-stable for 2013....The outlook for synthetic textiles remains negative for 2013 due to reversal of substitution demand and oversupply in domestic partially-oriented yarn, pressurising selling prices and margins of synthetic textile companies,” it said in the report ‘2013 Outlook: Indian Textiles’ here.

Muted international demand for cotton and surplus production are likely to keep cotton prices stable and range- bound during 2013.

“India Ratings expects cotton yarn manufacturers to benefit from slow but steady pick-up in domestic demand, the likely higher demand of cotton yarn from China, and improving margins on account of low cotton prices and firm cotton yarn prices.

“Stability in cotton prices will enable spinning mills to better plan the inventory buying. However, spinners in Southern India and Gujarat continue to under-utilise capacity due to power shortage, or incur high cost of self-generated power,” the report added.

The report expects garment exporters’ revenues to remain subdued because of the persistent economic slowdown in key export destinations of US and Europe, and continuous deterioration in India’s competitiveness in apparel exports.

However, to offset the impact, Indian exporters are diversifying into other geographies, it notes.

Credit profiles of companies incurring large debt-funded capex will remain subdued in 2013 given the input price risks, stricter lending norms and high borrowing costs.

A stable outlook on cotton and synthetic textiles would result from favourable policy environment, improvements in demand-supply position, continued stability in input costs and consequent improvement in margins/liquidity, it said.

It is unlikely that the sector’s outlook will turn positive until fundamental issues such as power shortage, lack of technology and modern machinery and demand slowdown are resolved, the report stated.

However, foreign direct investment in retail is an opportunity that would unleash demand in the long run and offset any slowdown in exports, it added.

Cotton outlook could be revised to negative if input costs turn volatile. Given the sector’s high debt dependence for operational as well as capex needs, any volatility in EBITDA could lead to huge swings in leverage, the rating agency said.