India Ratings and Research (Ind-Ra) recently revised the Indian textile sector’s outlook to negative for fiscal 2020-21 from stable, as weak domestic demand growth, threat of cheap imports and dwindling incentives and exports are likely to keep volumes muted. Ind-Ra however expects key raw material prices to remain low in the next fiscal after a correction in 2019-20.

That will contribute to a modest recovery in margins, stable working capital requirements and steady cash flows, Ind-Ra said in a press release.

Ind-Ra expects cotton prices to stabilise with improved cotton supply and an inventory build-up in 2020-21. The industry adjusting to a low dealer inventory is becoming the new normal. Easing of the goods and services tax (GST) implementation issues might only provide modest support to demand growth, unless liquidity improves. Liquidity remains chocked, with lack of bank funding and sluggish end-consumer demand.

Ind-Ra expects yarn production for 2020-21 to remain muted, with lack of visibility on wholesale demand. It also remains negative on the commodity segment and expects a marginal improvement in capacity utilisation in spinning mills under the cotton yarn segment. Sector consolidation will continue in the next fiscal, while the mid and small commodity players will continue to struggle.

The rating agency expects stable cotton-polyester staple fibre (PSF) spread to encourage switching to PSF, and hence, underpin the man-made textile demand. The spreads would help in improving the competitiveness of the synthetic value chain and support its demand growth. Globally, the consumption pattern remains skewed towards man-made textiles, contrary to domestic consumption. PSF prices would remain vulnerable to volatility in crude oil prices, should geo-political factors creep-up.

Textile exporters are likely to witness reduced demand on back of a weak Chinese demand, accompanied by declined cost competitiveness, leading to lower production volumes in 2020-21.

Ind-Ra expects withdrawal of the Merchandise Exports from India Scheme (MEIS) to affect export players of made-ups (home textiles) and garments. Exporters are likely to remain uncompetitive against counterparts in Pakistan, Bangladesh, Turkey and Vietnam due to further delays in the implementation of Rebate of State and Centre Levy of Taxes. All these factors would lead to margin pressures for exporters in 2020-21.

The company expects regulatory support in form of GST refunds for spinning chains and availability of input tax credit from units operating in the unorganised sector or composition scheme, to improve liquidity in the value chain. Also, the abolition of uncompetitive purified terephthalic acid imports could prove boon for the polyester value chain.