Production costs to go up for readymade garment makers

Even as input costs reduce for synthetic textile manufacturers, readymade garment players are set to see costs go up, post budget. Branded apparel retailers are likely to suffer the indirect fallout of duty hikes, reeling as they already are, from rising cotton prices.

The stocks of most textile companies ended Budget Day with good gains as costs are set to lower for a good many. Century Enka, Garware-Wall Ropes, Himatsingka Seide all closed with gains of 1 to 4 per cent. Select stocks, however, closed with heavy losses as they face potential cost increases. Pantaloon Retail, S Kumar's Nationwide and Cantabil Retail were down 2 to 6 per cent. Shrugging off potential cost increases were the stocks of Mandhana Industries, Shoppers' Stop, Brandhouse Retail among others managed gains of 0.5 to 5 per cent.

Cost reductions

The lowering of customs duties on textile inputs such as nylon fibre, nylon chips and caprolactam (used to manufacture nylon) to 7.5 per cent from the earlier 10 per cent will help reduce raw material bills. Companies such as Century Enka, JCT, SRF and Garware Wall Ropes use these inputs. In FY-10 the companies forked out about 12 per cent of revenues on raw material imports, down marginally from the 13 per cent in FY-09. The improvement in operating margins, from 14 to 21 per cent in the period are thus likely to sustain on the backs of healthy export market and rising demand for synthetic textiles as prices of cotton textiles soar.

Duty hikes

Readymade garment manufacturers, on the other hand, are likely to be a morose lot as they face a double whammy of withdrawal of the optional excise duty payment as well as a 10 per cent duty payment without input credits on apparel sold under a brand name. Production costs are therefore set to rise. While higher costs may be passed on to the retailer, there is likely to be a time lag. Larger players such as Mandhana Industries, S Kumars Nationwide, Bombay Rayon and Alok Industries, which have a direct relationship with retailers, may be better placed to pass on cost increases. Further, garment manufacturers such as Mandhana are also looking to launch their own brands to capitalise on the fast-growing domestic markets, which would also attract excise duties.

The last in line, the retailers are now facing another worry, on top of spiralling cotton prices and inflation eating into consumer wallets. The slim margins that these players work with may see further pressure as they do a fine balancing act between rising input costs, possibility of hiking prices and the effect price increases will have on demand. Retailers such as Shoppers Stop, Pantaloon, Brandhouse Retails, Trent and so on source finished goods from manufacturers to be sold under their various brands. Over 50 per cent of revenues go towards finished goods purchases. However, retailers such as Kewal Kiran, Celebrity Fashions and Koutons may manage to curb cost increases to an extent as they source part of their products from in-house manufacture.

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