Work from home aids recovery of home textiles market

Higher in-home consumption due to
increased stay-at-home period and a sharper focus on health and hygiene amid
the pandemic are helping Indian home textile exporters weave their way out of
the downturn faster than other textiles segments. Revenue de-growth for home
textile exporters will be limited to 10-12 per cent this fiscal compared with
30-35 per cent for the overall textile sector, indicates a CRISIL analysis of
50 companies that account for over 60 per cent of India’s home textile exports.

Lower revenues would hurt operating
margins. However, lower requirement of capacity addition and working capital
will limit material moderation in the credit profiles of home textile exporters
this fiscal.

The Rs 55,000 crore Indian home
textile sector, comprising products such as terry towels, bed sheets and
spreads, pillow cases, curtains, and rugs and carpets, derives as much as 60-70
per cent of its revenue from exports. The United States and the European Union
account for over 80 per cent of these exports, with big-box retailers of
essentials and departmental stores among the major customers.

Anuj Sethi, Senior Director, CRISIL
Ratings, said, “Export order flow has improved significantly beginning with the
second quarter of current fiscal due to reopening of departmental stores and
pent-up demand. With people spending more time at home, including for work,
drastically lower socialising opportunities, and sharper focus on health and
hygiene, demand for home textile products will continue to grow. Demand is
expected to stay strong in the third quarter as well due to the festive season,
when these retailers launch large-scale programmes.”

The improvement is borne out by a 7
per cent on-year sales growth in the fiscal second quarter for four large
listed home textile exporters who had logged 40 per cent lower revenue on-year
in the first quarter.

The lockdown had a limited impact on
retailers of essentials as these operated through the pandemic. However, sales
at departmental stores suffered heavily in the March-May period. Some retailers
also underwent restructuring, leading to permanent store closures.
Additionally, manufacturing was impacted due to plant shutdowns for 30-45 days.
A weak first quarter will have a bearing on revenues for the full fiscal, which
are expected to decline 10-12 per cent.

Also, lower capacity utilisation and
benign realisations in the first quarter will lead to suboptimal coverage of
fixed costs despite cheaper cotton prices and favourable currency movement.
This will lead to moderation in the operating margin of home textile exporters
by 200 basis points to 12-13 per cent from 15 per cent seen over the past two
fiscals.

With sufficient capacity available,
investments in capacity addition are expected to be moderate this fiscal. Also,
lower inventory requirements owing to continued soft cotton prices in the
coming season will keep working capital requirements stable, and hence debt
levels under control.

Gautam Shahi, Director, CRISIL
Ratings, said “While moderation in operating margins will lead to a decline in
the interest-coverage ratio* for the sample set to 3.5 times this fiscal from
4.5-5 times over the past two fiscals, the debt to equity ratio will still
sustain at adequate levels of 1-1.2 times because of controlled debt
utilisation. This will limit material impact on credit profiles.”

In the milieu, continued order flow
from major export markets, improvement in domestic demand, and the ability of
players to manage liquidity amid the continuing pandemic will be key
monitorables.

That said, home textile manufacturers
deriving a larger part of their revenue domestically are affected more than
exporters due to extensive lockdowns in India and gradual opening of many
retail outlets, leading to slower recovery.

* Interest-coverage ratio = Earnings
before interest, taxes, depreciation and amortisation (Ebitda) / interest cost