India Ratings expects the export demand to improve moderately in 2HFY22 on the back of accelerated vaccination and China Plus One sourcing strategy.
India Ratings and Research (Ind-Ra) has revised its outlook to neutral from improving on the overall textile sector for FY23. The agency is anticipating a sustained high demand on the normalisation of economic activities post COVID-19 in domestic as well as export markets, leading to increased sales volumes, although partly countered by a moderation in realisations. Furthermore, the Indian government has entered into free trade agreement negotiations with the UK while extending the Rebate of State and Central Taxes and Levies until March 2024. It had also announced the rates for Remission of Duties and Taxes on Exported Products in August 2021, covering the entire textile value chain. These measures continue to incentivise players to export value-added products. Ind-Ra, however, expects key raw material prices to remain firm for the medium term and only moderately correct by 1QFY23. The prices of man-made fibres (MMF) are likely to remain volatile, in line with crude oil price fluctuations.
Ind-Ra expects the demand momentum to continue in FY23 in view of the reduction in impact of COVID-19 and re-opening of retail space malls offices and schools along with the reduction in logistics issues for export demand. Domestic demand for all the textile sub-sectors has continued to improve from 2QFY22, after a slight dip in 1QFY22. The increased demand momentum along with the supply chain issues has increased the realisations. Demand for cotton remained all-time high in 2HFY21, leading to reduced opening stock for the new cotton season. The rise in prices of cotton has led spinners to accumulate the stock. The demand for MMF has also continued to increase, mainly due to the rise in cotton prices, leading to a shift of demand from cotton to MMF, to an extent. The demand momentum sustained for home textiles in the domestic market because of improved consumer spending.
Textile exporters in the cotton yarn segment continued to witness an improvement during 7MFY22 with volumes exceeding 47% yoy over FY21. Ind-Ra expects export volumes to remain higher for FY22 over FY20 and FY21, on back of an increasing demand for Indian yarn. The export of fabric and apparel also recovered to the pre-COVID levels during 8MFY22 and is likely to sustain with the opening up of economies and the adoption of China Plus One strategy by importing countries. Apparel and fabric exports during 8MFY22 were up 37.3% and 59% yoy, respectively, due to the low base effect and have reached pre-COVID levels. The agency expects the export demand to improve moderately in 2HFY22 on the back of 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 will continue to play an important role in boosting the demand.
About the author:
Ankita Shere is the Analyst at India Ratings and Research Pvt Ltd