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Textile & Apparel (T&A) exporters' earnings and EBITDA margins will be impacted in the near term due to the Indian rupee's (INR) 5% appreciation against the dollar in 2017 ytd and weak apparel imports from traditional markets such as US and UK, says India Ratings and Research (Ind-Ra). The on-going strength of the INR vs USD as reflected in the 3-month USDINR futures trading at around 65.19, constrains the price competitiveness of the Indian textile exporters. However Ind-Ra believes that apparel exporters' value-added garments mix, partially hedged forex exposure, debt-light structure and reasonable liquidity to support the overall business and financial risk profile. Furthermore strong domestic foothold of large spinners and weavers will mitigate any major impact on their business and credit risk profile.
Unabated strengthening of INR vis a vis USD in the current calendar year has added to the challenges of the T&A industry. Ind-Ra had highlighted in the report 'Stable Input Prices, Fiscal Incentives to Support Textile and Cotton in FY18' the muted performance in 3QFY17 due to high cotton prices (17% higher prices yoy), demonetization and slow global trade. The easing of liquidity over February - March 2017 propelled a recovery in production output and export volumes; however Ind-Ra believes export realisations will get dented due to the strong rupee.
More than 70% of Indian T&A exports are dollar denominated. Strong INR vs USD is likely to have an adverse impact on the export trade volumes and earnings, since fresh export orders will have reduced competitiveness. As on date, INR has strengthened by more than 5% in 2017, while there has been negligible or a favourable movement of 1%, 0.5% and -1% for major competing nations namely China, Bangladesh and Vietnam respectively. Ind-Ra estimates that INR realisations will shrink by 3%-5% in the near term and hence would impact the profitability of the companies across the textile value chain. Ind-Ra believes that this may offset some of the gains which will accrue from the government of India's export stimulus package, GST implementation and USA's exit from the Trans Pacific Partnership.
Ind-Ra believes that export-oriented apparel manufacturers with unhedged receivable positions will be the hurt the most, due to their geographically concentrated (US and Europe) earnings profile, low market share and restricted bargaining power with their global clients. Ind-Ra expects EBITDA margin erosion of around 150bp yoy in 4QFY17.
Earnings and EBITDA margins of Ind-Ra rated large spinners and weavers will be relatively less impacted due to their diverse earnings profile, coupled with cost and quality leadership of their products. While domestic demand has recovered from the negative impact of demonetisation, however strong cotton prices coupled with increased price competitiveness of imported yarn and fabric will pressurise margins. Thus balance sheet deleveraging over FY17-FY18 may not be met fully, due to the likely shortfall in operating profits.
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