Textile firms on expansion binge

To gain from the quota-free regime, up investments to Rs 2,415 crore in July '05

With the target of extracting maximum benefits from quota deregulation, a number of textile companies have announced plans to increase their capacities and enter more profitable stages of the textile and apparel value chain.

As a result, the industry has, over the last four quarters, witnessed a significant rise in the number of new projects planned and, hence, in investments. Especially, the May-July 2005 period saw an investment gush.

Investments in the Indian textiles and clothing industry are seeing robust growth as the new projects that require huge funds are coming up with remarkable regularity. Such investments mounted to a whopping Rs 2,415.1 crore in the July 2005 quarter against Rs 287 crore in the same period last year (and Rs 764.6 crore in the last quarter).

With as many as 49 (against 29 in the previous comparable quarter) existing projects under implementation in the July '05 quarter at investments of Rs 2281.6 crore, combined investments of the organised and the unorganised sectors shot up to Rs 6,945.4 crore (Rs 3,557.3 crore), an Icra report said.

Seven projects entailing an investment of Rs 150.18 crore were completed during the July 2005 quarter compared with three at Rs 61 crore in the previous quarter of the fiscal.

A significant decline in cotton costs "� coupled with growth in revenues, especially in the export markets "� led to strong growth in operating and net profits for the Indian textile and apparel industry. Besides, a drop in interest costs also helped the industry improve its margins.

Net sales of the Indian textile and apparel industry jumped to Rs 5,522 crore in the quarter ended June 30, 2005 against Rs 4,791.19 crore in the same period last year, posting 15.3 per cent growth.

Similarly, net profits surged 180.5 per cent to Rs 293.46 crore in the June quarter this year, from Rs 104.62 crore in the June 2004 quarter.

International cotton prices were ruling at six-year highs in 2003-04 mainly on account of supply shortage. This induced cotton producers to expand existing capacities and set up greenfield projects in order to cash in on the opportunity. However, Indian cotton prices showed a lower rise during 2003-04 mainly on the back of good rains and, hence, higher output.

Thus, the cotton yarn manufacturers had been showing growth in profits while cotton fabrics and other value-added textile manufacturers, especially those whose products were under the quota regime, had been showing decline in profits.

Under quotas, the value (in US dollar terms) and the volume of exports are both nearly fixed, whereby any rise in raw material costs and the rupee appreciation significantly affect the profitability of the textile manufacturers.

However, since September 2004, the cotton prices have seen a downward trend. Thus, since the third quarter of 2004-05, the cotton fabric manufacturers have started performing well while the cotton yarn producers' performance worsened.

During 2004-05, while the domestic readymade garments have shown fast growth in turnover, operating profits of the Indian textile and apparel industry, on the whole, saw only marginal growth. A marginal dip in interest costs and deferred tax resulted in a significant rise in profit after tax for the industry.