Glut squeezes denim margins

Continued addition of capacity has aggravated the glut in the denim industry. The oversupply has not only exerted price pressure on denim mills but also forced some of them to reduce capacity utilisation by 20-30 per cent.

Against a capacity of 1.3 billion metres, the domestic demand for denim is estimated to be around 600-700 million metres, and another 200-300 million metres are exported.

About a year ago, the denim industry was functioning at a capacity of close to 1 billion metres. However, existing as well as new players continue to add capacities. Denim fabric prices recently fell by 5-7 per cent in certain categories, according to industry players.

The Ahmedabad-based Aarvee Denims & Exports Ltd  is now partly producing non-denim fabric. "Our denim capacity utilisation is 70 per cent now. There has been both price and margin pressure due to overcapacity. We are forced to produce 30 per cent non-denim fabric," said Ashish Shah, the company's managing director.

Aarvee Denims, which has 85 million metres denim capacity, recently reduced prices by 5-7 per cent in certain fabric types.

Deepak Chiripal, CEO of Nandan Denim Ltd, said, "Though we have not reduced prices yet, rising input costs are exerting pressure. It is yet to be seen if the pressure from rising input costs will be borne by denim producers or consumers."

Nandan Denim is in the process of adding capacity. From 80 million metres now, the Rs 900-crore company's denim capacity will cross 100 million metres by 2015.

Some companies have been able to insulate themselves from glut in the domestic market by focusing on exports. "Over 60 per cent of our denim business comes from exports. This has helped us maintain 100 per cent capacity utilisation," said Jayesh Shah, director and CFO of Arvind Ltd, which has denim capacity of over 110 million metres.