India Ratings and Research (Ind-Ra)
has revised the textile sector outlook to improving for FY22 from negative,
reflecting the likelihood of higher revenues and operating margins, post
business disruptions led by COVID-19 in FY21. The agency expects the export and
domestic demand to improve, leading to a strong improvement in sales volumes
over FY22. The agency expects cotton fibre prices to stay steady while man-made
fibre (MMF) price would remain volatile in FY22. Ind-Ra however expects
improving realisations to lead to robust operating profitability and higher
operating cash flows in FY22.
Ind-Ra has revised the rating Outlook
to Stable for FY22 from negative, owing to improving credit metrics and healthy
financial flexibility. Strong operational cash flow should enable credit
metrics to improve, despite an increase in working capital requirements and
capital expenditure outflows. The benefits of integrated business operations,
healthy balance sheet liquidity, operating efficiencies and increasing
diversification over FY22 have already been factored into the ratings. Sector
players in the rating categories of A and above are likely to reflect
resilience to moderate raw material price volatility and may have
adequate-to-superior liquidity profiles. The agency has maintained a negative outlook
on small and mid-sized commodity pure-plays for FY22, in view of sector
consolidation and intensifying competition, both led by continued stress on
liquidity and subdued capacity utilisation.
The industry has witnessed a shift
towards home-hygiene economics during and post pandemic, resulting in sharper recoveries
for the home textile segment. While the spinning and apparels segment witnessed
pre-COVID recoveries during 2QFY21, MMF and fabrics recovered during 3QFY21,
led by a delayed improvement in domestic demand and festive sales. Liquidity
remains chocked for small players in the unorganised arena with lack of bank
funding and delayed recoveries. Consumer demand with over 30 months of slow
growth might improve in FY22 with a positive outlook on household spending and
rural discretionary spending. While players in spinning are likely to shy away
from capex until FY23 led by lower capacity utilisations. However, apparel and
made-ups are expected to continue investing in building capacities during FY22
with China Plus One sourcing metamorphosis playing out.
Textile exporters in the cotton and
yarn segments continued to recover in 2Q-3QFY21, with cotton yarn volumes
higher by 8 per cent yoy during 9MFY21. While cotton fabrics reported uneven
growth on a monthly and yearly basis, apparel exports increased over September-November
2020, before declining in December 2020 by 15 per cent yoy on account of a
second COVID-19 wave in consuming economies. Apparel exports and MMF exports
for 9MFY21 were lower by 28 and 30 per cent respectively yoy in 9MFY21. The
agency expects the export demand to improve moderately in 4QFY21, on back of
the accelerated vaccination and China Plus One sourcing strategy, and to
continue the trajectory over FY22. Furthermore, the ongoing impact of sourcing
restriction of China (Xinjiang) cotton could play an important role in it.
Market share consolidation post COVID
is likely to continue in FY22, at the cost of mid and small commodity players.
Spinning, fabrics and MMF sector consolidation will continue in the medium
term, benefiting large scale issuers. Ind-Ra expects the textile sector’s
leverage in FY22 to improve from FY21 levels and sustain around FY20’s,
supported by healthy EBITDA generation and a recovery in demand-consumption
levels.