Denim Fabric Industry to Continue to Witness Overcapacity & Margin Pressures

India Ratings and Research (Ind-Ra) expects the domestic denim fabric industry to continue to face margin pressures during FY19 due to oversupply, with 15%-20% of the total capacity remaining underutilised. India is one of the leading denim fabric manufacturers in the world, with a manufacturing capacity of about 1,500 million metres per annum (mmpa). Additionally, competition will intensify as several players have undertaken capacity additions to add another 100-150mmpa by FY19.

Garmenting Capacity to Grow at a Slower Pace than Fabric Capacity: The long-term demand potential for the segment remains intact due to denim's versatile fashion appeal among young populace, rising disposable income and untapped semi-urban pockets of the country. However, Ind-Ra expects denim fabric capacity additions to outpace garmenting capacity additions over the short term, translating into a continued denim fabric surplus in the market. The denim fabric industry is cyclical in nature and is characterised by periods of excess capacity; however, Ind-Ra expects the present downturn to be relatively prolonged, partly on account of the regulatory disruptions that the industry underwent in FY17-FY18.

 

Ind-Ra expects the sector's operating margins to remain in the range of 10%-11% in FY18-FY19. The agency's denim fabric peer set average EBITDA margins deteriorated in 9MFY18 to 10.7% (FY17: 11.6%, FY16: 12.9%).

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