ICRA pandamic impact behind Indian textile sector

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With the worst of the pandemic impact behind us, the Indian textile sector is now on a recovery path, according to Moody’s Investors Service Company ICRA. Revising the FY2022 outlook for the Indian textile sector to ‘stable’, the rating agency added that risks, however, remain given the nascency of recovery and the continuing impact of the pandemic.

 

“Indian as well as the global cotton output is expected to decline in CYg21 (Global Cotton Year ending July 2021). As the demand is likely to rebound on recovery from the pandemic impact, cotton stocks are expected to decline. However, despite moderation, absolute cotton stocks as well as the cotton stock-to-use ratio are expected to remain high, owing to sizeable carryover stocks brought forward from the previous year,” ICRA said in its report.

Continued high cotton stocks may create a downward bias in domestic prices towards the end of the harvest season, as the recovery trajectory moves towards normalcy. Since domestic prices are also guided by minimum support price (MSP), this may continue to act as a price floor, the report said.

While the improvement in downstream demand, together with competitive cotton/yarn prices are expected to support continued recovery in India’s cotton yarn exports, these are likely to remain lower than the peak levels seen between FY2014 and FY2019, amid a challenging international market landscape (resulting from geopolitical tensions, China’s preference to procure from Vietnam and Pakistan, trade pacts, etc).

Supported by export demand, even as demand from domestic downstream segments may recover at a slower pace, yarn realisations and contribution margins are expected to remain at comfortable levels in FY2022. Profitability will also be driven by cotton stocking policy of companies, as downward movement in cotton prices could bring down realisations, while cotton gets stocked at relatively higher prices prevailing at present, the report said in its key metrics section.

Fabric production is also likely to revert to growth in FY2022, with improved demand from the downstream segments. “Within fabrics, cotton knitted fabrics and blended knitted fabrics are likely to perform better, given the shift being witnessed in consumer usage and preferences, in favour of casual/active/lounge wear,” according to ICRA.

Global apparel trade is expected to revert to pre-COVID levels in calendar year 2021 and grow at a muted pace of 1-2 per cent per annum in the near to medium term, in line with the past five years. The report notes that the growth in the near term is likely to be driven by volumes, as realisations may decline amid softer raw material prices, downtrading and shift in preference towards lower-value apparels.

India’s apparel exports are expected to revert to growth trajectory in FY2022 with recovery in demand in key markets of the US and the EU, partly benefitting from the low base effect. “The export demand is also likely to be supported by increasing focus of large buyers on diversifying their sourcing base beyond China,” the report mentions, but cautions that risk of fresh wave/ surge in infections, however, remains.

Domestic apparel players are expected to report a healthy recovery in FY2022. However, growth in some segments such as formal wear/ party wear is likely to remain lower vis-à-vis other essential product categories.