Home textile exporters may take profit hit

Lower realisations from American retailers, coupled with reduced export incentives after implementation of the goods and services tax (GST), could pull down home textiles exporters' profits by 200-300 basis points (bps) in 2017-18, says rating agency CRISIL.

Several traditional retailers in the US have pruned inventories and downsized stores to offset profit pressure caused by the e-retail boom. To cushion the resulting fall in utilisation, Indian exporters have been enhancing their share of the business with US e-retailers but at lower realisations.

Also, unlike Bangladesh and Pakistan, which enjoy duty-free access to European markets, Indian home textiles exporters' competitiveness is affected by a 10 per cent duty on their products.

These companies have also been affected by the lowering of the duty drawback rate and rebate of state levies to 2 per cent from 7.5 per cent and 3.9 per cent, respectively, in the post-GST era. This has been partly compensated by an increase in the incentive under the Merchandise Exports from India Scheme (MEIS) from 2 per cent to 4 per cent.

The combined factors, according to Anuj Sethi, senior director at CRISIL, could hit profits of home textile exporters' in 2017-18. Earnings before interest, tax, depreciation and amortisation (Ebitda) or operating margins might fall to 16 per cent from 19 per cent in 2016-17.

“Our study of 63 firms, including 59 rated by CRISIL, which account for 70 per cent of India's home textile exports, indicates that despite relief under the MEIS this fiscal year, average export incentives as a percentage of revenue will be lower by at least 200 basis points,” said Sethi.

This comes after India’s share in US imports of cotton bedsheets and terylene towels rose from 34 per cent to about 40 per cent in 2016-17, because they were cheaper then exports from China and Pakistan. CRISIL says America accounts for a third of the global home textile market, worth $16 billion. Almost 47 per cent of India's home textile exports of $5.3 billion in FY17 was to the US.

However, demand for Indian home textiles will continue to grow at 8 per cent as seen in the recent past, helped by exports to traditional markets and better penetration in new ones such as Asia, Australia, South America and Canada.

“Given the still healthy demand, CRISIL expects the 63 firms to spend as much as Rs 37 bn to expand capacities in fiscal years 207-18 and 2018-19. That would be significant, considering that Rs 46 bn has already been spent in the previous two years,” said Rajeswari Karthigeyan, associate director at CRISIL.

Debt being raised for capacity expansion (net of repayments) and lower Ebitda margins are expected to result in the aggregate debt to Ebitda ratio increasing to 3 times in the near term, from 2.5 times in 2016-17. Nevertheless, the credit profiles of CRISIL-rated companies are not expected to be materially affected.