Textile MSMEs look to drop in raw material prices to check fall in profit margins

The textile sector accounts for about 14 per cent of India's industrial production and nearly 12 per cent of the country's export earnings. CRISIL has analysed the performance of more than 200 micro, small, and medium enterprises (MSMEs) in the textile sector, rated on the basis of their financials during the period 2011-12 to 2013-14 (financial year April 1 to March 31). The analysis reveals that while net sales have registered a compound annual growth rate (CAGR) of 20 per cent, the operating profit and net profit margins have declined by 10-30 basis points (one percentage point is 100 basis points) during the three-year period.

The operating profit margins declined on account of raw material price volatility and other factors. Additionally, higher interest and depreciation costs as a result of capacity additions and modernisation have also contributed to a decline in the net profit margins. CRISIL expects a slowdown in both domestic demand and export demand from the Western markets during 2015-16. However, favourable raw material prices are expected to result in a marginal improvement in profit margins.

Note: CRISIL has rated over 75,000 MSMEs in India. This fortnightly tracker presents to our readers insights on MSMEs, a key element of the Indian economy.The analysis is based on the latest audited financial statements of CRISIL-rated MSMEs. Most enterprises finalise their audited financials by the end of the second quarter, after the closure of the financial year.