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Impact of 2nd Covid wave to be less severe on textiles

May 18, 2021
Impact of 2nd Covid wave to be less severe on textiles


The second Covid wave might slightly impact the Indian textile industry’s supply and demand dynamics primarily in 1QFY22, according to an India Ratings and Research (Ind-Ra) report. However, a sustained export demand, learnings from the first wave, stronger balance sheet and liquidity, compared to 4QFY20 when the first wave struck the economy, will enable the sector credit profile to remain stable in FY22.

The supply chain has been impacted by the local lockdowns imposed at key textile hubs such as Tirupur, Ludhiana, Surat and Bhilwara. The restricted movement of goods means non-availability of inputs such as yarns and fabric is likely to have a short-term impact on the finished output. The labour availability has also been impacted but moderately and at much lesser severity than that during the first wave. Shop floor are likely to remain functional at a few plant sites but a restricted occupancy level. However, 1QFY22 may not be a lost quarter, thanks to strong export markets. Moreover, most cotton textile players will have adequate inventory given the second wave has hit us in April-May and because the fresh inventory is available during November to March.

This supply chain disruption may lead to a 20%-30% YoY of reduction in toplines in 1QFY22. Again, the recovery expectation varies depending on the sub-sector. Export-focused garments and home textiles are likely to remain resilient compared to the spinning and fabric segment. The export order book was reported to be YoY higher at end-March 2021 with garment players. However, the 1QFY21 shipments are likely to get deferred to 2QFY22. Challenges on the availability of containers and high shipping costs however have been impacting profitability since 3QFY21 and are likely to remain in so in the near term.

As such beyond 1QFY22, India Ratings and Research assumes a demand recovery across the sub-segments, driven by the unleashing of pent-up demand in 2HFY22 with the start of retail, offices, educational institutions, social functions among other things, moderately countered by weak household balance sheets. The growth rates will also benefit from the low base effect. Ind-Ra expects the export demand to remain favourable with geo-political tensions and China, Plus One story continuing to play. Demand recovery continues in export markets, which is at least 30% of the India’s total textile produce.

Though raw material prices increased in 2HFY21, but the product pricing did not catch up commensurately. Product pricing is now beginning to catch-up across upstream, mid-stream and downstream segments, leading to a margin expansion in FY22.

Capital investments in the sector were subdued due to uncertainty on export incentives in the last two years and pending details on Production-Linked Incentives (PLI) scheme in the last few months. While the debt moratorium and credit guarantee scheme helped the sector to manage liquidity, 3QFY21 and 4QFY21 have been favourable quarters and as such sector participants thus are better placed to face the impact of the second covid wave.