Ind-Ra revises outlook on textile sector to negative from stable

Rating agency Ind-Ra has revised the outlook on India's textile sector to negative from stable for 2020-21 as weak domestic demand growth, threat of cheap imports and dwindling incentives and exports are likely to keep volumes muted.

Ind-Ra expects withdrawal of incentives under the merchandise exports from India scheme (MEIS) to affect export players of made-ups (home textiles) and garments.

"Exporters are likely to remain uncompetitive against counterparts in Pakistan, Bangladesh, Turkey and Vietnam, due to further delays in the implementation of Rebate of State and Centre levy of Taxes. All these factors would lead to margin pressures for exporters in FY21," India Ratings and Research (Ind-Ra) said.

However, it expects key raw material prices to remain low in 2020-21, after a correction in 2019-20, contributing to a modest recovery in margins, stable working capital requirements and steady cash flows.

Ind-Ra also anticipates cotton prices to stabilise with improved cotton supply and an inventory build-up in the next fiscal.

"The industry adjusting to a low dealer inventory is becoming the new normal. Easing of the GST implementation issues might only provide modest support to demand growth, unless liquidity improves. Liquidity remains chocked, with lack of bank funding and sluggish end-consumer demand," it said.

The rating agency estimates yarn production for 2020-21 to remain muted, with lack of visibility on wholesale demand. It also remains negative on the commodity segment and expects a marginal improvement in capacity utilisation in spinning mills under the cotton yarn segment. Sector consolidation will continue in 2020-21, while the mid and small commodity players continuing to struggle.

According to Ind-Ra, domestic textile exporters are likely to witness reduced demand on the back of a weak Chinese demand, accompanied by declined cost competitiveness, leading to lower production volumes in 2020-21.

However, the rating agency expects regulatory support in form of GST refunds for spinning chains and availability of input tax credit from units operating in the unorganised sector or composition scheme, to improve liquidity in the value chain.