Commodity Analysis

What can the government do to save textile mills?

Rajalakshmi Nirmal | Updated on February 23, 2020 Published on February 22, 2020

Reeling under severe cash crunch, textile units hope the Centre will play the white knight

The Indian textile mill industry, which employs about 10 crore people directly and indirectly, is at a crossroads. Many of its players — one in every three, to be precise — are facing a severe cash-flow crisis. If the Centre doesn’t lend a helping hand, over the next few years many textile companies will go belly up, resulting in large scale job losses.

A study commissioned by the Indian Texpreneurs Federation (ITF), an association representing the entire value chain of textile manufacturing in Tamil Nadu, and done by CRISIL, found that many textile companies in the country are under working-capital stress.

The study, which BusinessLine is privy to, covered a total of 1,150 spinning mills and 700 ready-made garment units, capturing a third of the industry in terms of revenue. In 2017-18, the 1,150 spinning mills recorded a revenue of ₹2.17- lakh crore, but an aggregate profit was only ₹2,177 crore — a net profit margin of just 1 per cent. Equally bad was the condition of ready-made garment mills — a total revenue of ₹89,271 crore and a net profit of ₹1,161 crore, which is a profit margin of 1.3 per cent.

There are at least 600 companies that have 5-7 per cent net profit margins, but the loss-making small spinning mills and ready-made garment units pulled down the profit margin to 1 per cent for the sample group in the study.

Weak financials

The pressure on profitability has increased in recent years. A drop in demand for textiles following the euro zone crisis, the US-China trade war and high volatility in cotton prices (price per candy of cotton has been vaulting between ₹38,000 and ₹48,000 over the past two years) have played spoilsport.

Cotton yarn exports in the first nine months of 2019 were down by 50 per cent over the same period in the previous year.

While large mills with cash in coffers have managed, weaker units with funding constraints have been bleeding.

Ideally, for any capital-intensive business, the operating profit margin should be at least 12-14 per cent, but the operating profit margin of the 1,150 spinning mills that were analysed by CRISIL was 7.8 per cent in 2018.

The rating agency expects this to worsen to 6.9 per cent in 2019 and 5.4 per cent in 2020.

The shortage of working capital puts mills at a disadvantage on many aspects. One, while mills that could pay in cash in 7-15 days can buy cotton at a lower price, others have to pay extra.

In the last cotton year, for instance, while those who could buy in cash paid ₹120-122/kg for cotton fibre, mills that asked for a longer credit time were charged ₹133-135/kg by ginners.

Further, the players who buy on a long credit get poor quality cotton, hitting their realisation.

Prabhu Dhamodharan, Convenor, ITF, says if there is working capital support, the distressed mills can see an improvement of 6-7 percentage points in their operating margins. “While on one side they will save 4-5 per cent on raw material cost as they will be ready to pay the supplier in cash, on the other side, they can sell directly to customers and not go through traders and realise ₹4-5/kg higher on yarn. If funds are available, mills can also invest in process efficiency which will bump up margins.”

Solution

Banks have been hesitant to lend to textile companies. Even those companies that give collaterals get loan only to the extent of 50 per cent or less from banks, say mill owners.

This has blown up the liquidity crisis in the sector. As per the CRISIL report, the gross bank credit to the textile sector has not increased much since 2014-15 and has been to the tune of ₹2-lakh crore.

While the fear of banks is not without a reason, if there is no additional funding for these units, they may soon turn NPAs (non-performing assets). If the Centre is able to nudge banks to do a case-by-case appraisal and lend, many good mills that are grasping at straws will revive.

A moratorium for existing loans, for at least two years, will reduce the pressure on mills immediately. However, this will not be sufficient, says Dhamodharan. “Fresh funding will also be required, in addition to converting existing working-capital loans to long-term loans for 5-7 years.” If banks want to avoid an NPA trap in future, they have to do some fresh lending to spinning mills and ready-made garment units now. Banks can have an enhanced surveillance mechanism and keep a check on the way mills are putting the additional funds to use.

Members of ITF have taken the grievances of the industry to the Textile Ministry and are hopeful of a positive outcome soon.

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Published on February 22, 2020
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