Demand for apparels is expected to slowdown in near term following the government's decision to demonetise high value notes, and and winter-wear segment would be the worst affected, rating agency ICRA said in a report here.
The adverse impact of the demonetisation on disposable incomes and hence consumer spending has resulted in a slowdown in domestic demand for apparels and other end-products of textile industry in the immediate term.
The inventory accumulation with the retailers will, in turn, cause deferment of purchases from apparel/home-textile manufacturers focused on domestic market in the near term, besides resulting in stretched payments.
While textile retailers are facing immediate effect, the impact on apparel manufacturers and other intermediaries in the value chain is expected to be felt with a lag of a few weeks, with reduction in orders due to a slower offtake of the channel inventory.
The overall impact on the sector, however, is expected to be limited as 1/3rd of the Indian textile industry estimated to be export focused directly or indirectly.
Also, as the demand reverts back to a steady state over the next few months with expected improvement in liquidity, this impact will be neutralised.
In ICRA's assessment, the impact of demonetisation is likely to be the most severe for winter-wear retailers and manufacturers focused on the domestic market, who witness 60-70 per cent of their annual sales during the period October-February.
Though from the manufacturers' end, the shipments typically take place by September-October, pressure on sales in the retail space during the subsequent peak season can indirectly affect manufacturers.
ICRA said that the harvest season for cotton in India begins in October, with major cotton arrivals happening till March. New cotton arrivals are typically accompanied by softening of cotton prices from the levels during the period April-September.
Accordingly, farmers are holding on to inventories resulting in a fall in daily cotton arrivals in November 2016, thereby resulting in artificial supply shortage and bottoming of cotton prices.
In ICRA's view, the slowdown in cotton arrivals and
resultant marginal up-tick in cotton price post November 8 is a short-term phenomenon, which has already started to correct, as farmers have gradually started accepting alternate modes of payments.
Further, the yarn manufacturers are expected to be insulated from this mismatch, given the sizeable inventory maintained by them on an ongoing basis.
The impact of the demonetisation is expected to be felt across the textile value chain in the near term. While on the one hand, the impact is likely to trickle down from a slowdown in spending on apparels and other end products on the demand side.
At the same time, the reduction of currency in circulation is likely to adversely affect the unorganised segment and cotton procurement in the ongoing season of inventory build-up. Nevertheless, this is only expected to be a short-term phenomenon, ICRA said.