SMERA Weekly Report: Sector Analysis (Textiles)

Transcription

1 SMERA Weekly Report: Sector Analysis (Textiles) As the global economy slows down and China scrambles to safeguard its faltering manufacturing sector, SMERA estimates that difficult conditions in the cotton (textiles) market will further intensify. India has emerged as the world s largest producer of cotton in recent years, but has primarily focused on the initial stages of the supply chain, thereby keeping engagement per capita income low (as compared to global standards). However, the maximum value for the sector will be generated through a more integrated approach especially in the spinning, weaving, processing and garmenting phases. November 3, 2015

2 SMERA Sector Estimates Sector IIP Share: Textiles *# (6.16% of Total) Sector IIP Share: Cotton (Textiles Weight: 61.64) (3.69% of Total) Sector IIP Growth (April-Aug ) 1.6% Sector GDP Share 5% Textile Industry Size (Bn $) (Domestic + Export) $ Bn Export Size (Bn $) $38-40 Bn Cotton Cotton Size (Units) Lac Bales (1 bale = 170 Kg) Area Under Cultivation (AUC) Million Hectares Yield 525 Kg Cotton Yarn Demand Growth (Cotton yarn) 5-6% Utilization Rate (Cotton: Spinning) 82-85% Cotton Yarn Production Million Tonnes Global Production Share 17.3% Source: SMERA Research, CSO; *Includes Polyester; #Total IIP Weight: 1000 SMERA Sector Perspective Due to the global fall in demand and Chinese rate cuts, SMERA estimates that competition in the cotton (textiles) market will further intensify, affecting margins. India has emerged as the world s largest producer of cotton in recent years, but has primarily focused on the initial stages of the supply chain thereby keeping engagement per capita incomes low (as compared to global standards). But maximum value for the sector will be generated through a more integrated approach especially in the spinning, weaving, processing and garmenting phases. This argument comes from the fact that the initial (more basic) operations such as farming and ginning are highly correlated with the volatility in cotton prices and always face a sense of uncertainty, depending on the vagaries of the monsoon and global supply-demand equilibrium. Also, the margins during the initial phase of the supply chain are low. Comparison of EBITDA margin for integrated textile players and standalone spinners 25% 20% 15% 10% 5% 0% FY09 FY10 FY11 FY12 FY13 FY14 FY15 80% 60% 40% 20% 0% Integrated player EBITDA % Standalone player EBITDA % Utilisation % (RHS) Source: SMERA Research

3 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY09 FY10 FY11 FY12 FY13 FY14 FY15 SMERA believes that companies with integrated operations are in a better position to service their debt and create more value. Such companies have diversified revenue streams and hence are better placed to receive higher investment grade ratings. Standalone companies are more vulnerable to raw material price movements and have limited geographic reach. Integrated Players Are Better Performers Integrated Textile Player Standalone Spinner ICR D/E ICR D/E Source: SMERA Research; * ICR: Interest Coverage Ratio; D/E: Debt to Equity Share of garments in total textile export from India on the rise, with decline in low value added products % % 39.7% 39.1% 21.7% 21.9% 22.0% 44.7% 15.6% 45.0% 40.0% 35.0% 30.0% 25.0% 20.0% 15.0% 30.0 FY12 FY13 FY14 FY15 India's textile export (USD Bn) Cotton + Cotton yarn (%) Garment (%) 10.0% Source: SMERA Research SMERA estimates that share of raw cotton and yarn has declined to less than 16% of India s exports in FY15. While share of Bangladesh (within cotton and yarn category) has risen to 22%, Chinese imports have declined to less than 40% from the highs of over 50% in the recent past. Clearly, the Chinese have reduced their capacity due to fall in global demand and raw material import from

4 countries such as India. However, this might change in the near future due to the recent rate cuts in the Middle Kingdom 1 which may lead to capacity augmentation (instigated by cheap credit and domestic demand push) in the Textiles industry. 1 links to - SMERA Market Update Chinese Rate Cut USD Bn FY12 FY13 FY14 FY15 India's textile export Cotton + Cotton yarn Cotton + Cotton yarn (%) 21.7% 21.9% 22.0% 15.6% Apparels and Home textile (%) 39.7% 39.1% 39.9% 44.7% Cotton + Cotton yarn export to : China Bangladesh China s imports on decline; Raw Cotton Less in Demand Globally Share in Cotton and yarn export 60.0% 55.5% 50.0% 40.0% 30.0% 20.0% 10.0% 12.5% 46.2% 46.6% 15.6% 15.5% 38.4% 22.1% 0.0% FY12 FY13 FY14 FY15 China Bangladesh Share of raw cotton in exports is also on a downward trend and signifies a convergence toward higher value added goods categories. SMERA believes that this is a very good opportunity for India to use its raw cotton to further add value to its supply chain and create more wealth for the engaged population. As per SMERA estimates, of the $38 Bn exports, India exported $2 bn of raw cotton (farming and ginning phase) and $4 Bn of cotton yarn (spinning phase) during FY15. If these goods were exported at fabric/garment level, the incremental value created would have resulted in the following benefits: 1) Incremental exports worth $8-10 Bn 2) Higher utilization of domestic capacity 3) Fully integrated players (spinning + weaving + processing) enjoy higher EBITDA margins (16-18%) as compared to standalone players (10-12%)

5 The Maharashtra and Gujarat Conundrum: Understanding the Issue of the Textiles (Cotton) Industry s Non-Integration in India A boost in the yield level of Maharashtra, which is currently at 350 kg Hectare, will in theory benefit the overall average of India as the state has the largest area under cultivation. India s average yield is 525 kg (source: cotton corporation of India). There is tremendous scope for productivity improvement as Indian yields are at least 40% lower than the global average yield. SMERA believes that since India has large area under cotton cultivation, it is actually dragging down the global average yield by around 20% by being less efficient. Primarily, the country s lower productivity is connected to factors such as low average land holding, low irrigation (higher dependence on monsoon) and an inefficient labour intensive setup (usage of lower capital). India has emerged as the world s largest cotton producer. The country s yield in Pre-BT (Year 2005) was below 350 Kg Ha, however as the usage of the former increased and penetration levels reached over 95%, there is a drastic improvement. Maharashtra and Gujarat, the largest states in the country are however not matching up with competition when it comes to the creation of real incremental value. Both states are exporting a majority of their Cotton produce (60-70%) to regional Textile hubs in Tamil Nadu and other international export destinations such as China and Bangladesh. We believe that subsidies under TUFS have helped the Cotton industries of these two large states, but the pace of capacity expansion and diversification is not fast enough. Maharashtra and Gujarat together have spindleage capacity of 16% as compared to 42% of Tamil Nadu. SMERA estimates that Gujarat and Maharashtra are using only 15% and 30% respectively of their cotton produce for further processing with the balance being traded without value add. On the other hand, Tamil Nadu, a net importer and the primary market for the raw Cotton coming from the other two large states, consumes 13 times more than its internal production levels. This anomaly is connected to Tamil Nadu s Coimbatore city s prominence as a Textiles hub, enjoying most of the possible forward and backward linkages in the industry. Arguably, because of the sheer volume of Cotton traded in the Southern state, the integration of the processes is easier and hence a higher value is derived. Tamil Nadu however as a manufacturing destination has its own shortcomings and also due to power deficiency- the utilization levels of spinning industry in the state has remained lower as compared to Northern hubs. In this light of this, SMERA believes that on a pan India basis, a higher value add can be achieved if raw Cotton and Yarn are domestically consumed though better integration especially at the Spinning, Weaving, Processing and Garmenting stages. Maharashtra and Gujarat, with their 80 and 120 Lac Bales of production are very well positioned to take advantage of such value additions achieved at the advanced stage of the value chain.

6 Annexure 1 Rating Rationale of Vallabh Textiles Company Limited (VTCL) SMERA has assigned a long term rating of SMERA BBB- (read as SMERA triple B minus) and a shortterm rating of SMERA A3 (read as SMERA A three) to the bank facilities of Vallabh Textiles Company Limited (VTCL). The outlook is Stable. The ratings are supported by the company s experienced management, large and consistently growing scale of operations and established customer base. Further, the ratings also draw support from the company s healthy net worth, operating margin and the benefits derived from TUFS (Technology Upgradation Fund Scheme). The ratings also note increase of India s share in the USA terry towel market. However, the ratings are constrained by the company s high debt-to-equity ratio, exposure to foreign exchange fluctuation risk and fluctuations in raw material prices. VTCL, incorporated in 2002 is a Punjab-based company engaged in the manufacture and export of terry towel and bath robes. The company is part of the Vallabh group. VTCL is managed by Mr. Vikram Jain, who has more than a decade of experience in the textile industry. VTCL s operating income has grown at a CAGR of 14 per cent in the past three years ending March The operating revenue of the company increased to Rs crore in FY2015 from Rs crore in FY2013. VTCL has an established customer base spread across the globe with reputed names such as Sunham Homes Fashions (which supplies to brands like Lacoste, Hugo Boss, Kenneth Cole Reaction Home), Primark, Bed Bath N Table among others to its credit. Most of its customers are concentrated in the USA (~30 percent) followed by Europe, Japan, Australia and Canada. VTCL has a healthy net worth of Rs crore as on March 31, 2015 that includes unsecured loans from promoters of Rs crore treated as quasi equity. The operating profit of the company is healthy at percent in FY2015 as compared to percent in FY2014. India s share in USA terry towel market has increased by ~16 percent in FY2015 from FY2014. India exported ~62 percent of its terry towel to USA in FY2015 which accounts for ~Rs.3720 crore. VCTL has availed interest subsidy benefits of 4.5 percent under TUFS. However, the debt to-equity-ratio of the company is high at ~3 times as on March 31, Furthermore, the gearing of the company is expected to decline in future as VTCL has no debt funded capex plans. VTCL exports terry towel to USA, Europe, and Japan. The company s share of exports stands at ~91 percent in FY2015 out of the total revenue. The risk of adverse forex fluctuations are mitigated through adequate hedging mechanisms adopted by the company. About the Company VTCL, incorporated in 2002 was promoted by Mr. Vikram Jain, who has more than a decade experience in the textile industry. The company manufactures terry towels and bath robes at its manufacturing facilities in Ludhiana, Punjab and exports them to USA, Europe, and Japan. VTCL has installed capacity of 6500 tonnes of yarn per annum.

7 Annexure 2 Rating rationale of TDB Spinners Private Limited SMERA has assigned ratings of SMERA BB- (read as SMERA double B minus) and SMERA A4 (read as SMERA A four) to the crore bank facilities of TDB Spinners Private Limited (TSPL). The outlook is Stable. The ratings have taken into account the consolidation of the business and financial risk profiles of TSPL and M.K. Cotex (MKC) together referred to as the TDB Group. The consolidation is due to the common ownership and operational linkages within the group. The ratings are constrained by the company s weak profitability in a highly competitive and fragmented textile industry and exposure of the company to raw material price volatility. However, the ratings draw comfort from the group s experienced management and moderate financial risk profile. About the Company TSPL, incorporated in 1996, is an Indore-based company that was taken over in 2006 by Mr. Akhilesh Gupta and Mr. Amrish Gupta who possess around a decade experience in the textile industry. The company is engaged in the manufacturing and trading of cotton and blended yarn (polyester and viscose) of count ranging from 8s to 40s at its manufacturing plant at Indore, Madhya Pradesh. TSPL reported net profit of Rs.0.75 crore (provisional) on operating income of Rs for FY as compared to net profit of Rs.1.15 crore on operating income of Rs crore for FY The company s net worth stood at Rs crore (provisional) as on March 31, 2015 as compared with Rs crore as on March 31, About the TDB Group The TDB Group reported net profit of Rs.0.96 crore (provisional) on operating income of Rs crore for FY as compared to net profit of Rs.0.39 crore on operating income of Rs crore for FY The group s net worth stood at Rs crore (provisional) as on March 31, 2015, as compared with Rs crore as on March 31, 2014.

8 Annexure 3 Rating Rationale of Mountain Spinning Mills Limited SMERA has assigned a long-term rating of SMERA B- (read as SMERA single B minus) and a shortterm rating of SMERA A4 (read as SMERA A four) to the bank facilities of Mountain Spinning Mills Limited (MSML). The outlook is Stable. The ratings are constrained by the company s modest scale of operations in a highly competitive and fragmented segment of the textile industry. The ratings are also constrained by the company s weak financial profile and stretched liquidity positions. The ratings note that the company s profit margins are susceptible to volatility in raw material prices. However, the ratings are supported by the company s long track of operations and experienced management. MSML, incorporated in 1990, is a Tuticorin-based company engaged in manufacturing of cotton yarn. MSML has a modest operating scale with revenues of Rs crore in FY (refers to financial year, April 01 to March 31). The company faces intense competition from several players engaged in manufacturing of cotton yarn. MSML s weak financial risk profile is marked by low net worth of Rs.5.06 crore and high leverage of 4.62 times as on March 31, The company s interest coverage ratio is low at 1.04 times in FY MSML has incurred net losses over the last three years on account of volatility in raw material prices and power outages in Tamil Nadu. MSML s stretched liquidity position is reflected in average working capital utilisation of 87 per cent during March 2014 to August MSML benefits from its experienced management. Mr. G. Vettivel, director of MSML, has around two decades of experience in the company s line of business. About the company MSML, incorporated in 1990, is a Tuticorin-based company promoted by Mr. G. Vettivel. MSML is engaged in manufacturing of cotton yarn. The company has a manufacturing unit in Tuticorin (Tamil Nadu), with installed capacity of ~27,072 spindles. SMERA Economics Team Operations Contact Media Contact Karan Mehrishi Lead Economist Economic Research Team SMERA Ratings karan.mehrishi@smera.in Arindam Som Associate Economic Research team SMERA Ratings associate@smera.in Vinay Chhawchharia Associate Vice President Corporate Ratings SMERA Ratings vinay.chhawchharia@smera.in Bedabrata Bagchi Manager Marketing SMERA Ratings bedabrata.bagchi@smera.in

9 Our Presence ABOUT US SMERA Ratings Limited is a joint initiative of SIDBI, Dun & Bradstreet Information Services India Private Limited (D&B) and leading public and private sector banks in India. SMERA, so far, has assigned 37,000 ratings. SMERA is a full service credit rating agency registered with SEBI for rating of debt instruments, and NSIC for rating of MSMEs. SMERA has also received accreditation from Reserve Bank of India for rating of bank facilities.