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					                                            TEXTILES
•   US and European markets dominate the global textile trade,
    accounting for 64% of clothing and 39% of the textile market.           APPAREL EXPORTS TO THE US (FY09)
    With the dismantling of quotas, global textile trade is expected    (% YoY change)          Volume         Value       Realisation
    to grow (as per McKinsey estimates) to US$ 650 bn by 2010
    (3-year CAGR of 10%). However, as against expectations, in          India                         2.6       (5.1)              (7.5)
    the post-quota regime, the resurgence in exports to the now         China                       (1.9)         3.9                6.0
    unregulated markets took off rather slowly.
                                                                        Vietnam                     16.8         16.9                0.2
•   Post the removal of quotas (during the period FY05 to FY09),
                                                                        Bangladesh                    7.8        13.0                4.9
    India has witnessed the third highest CAGR in apparel exports
    to the US after Indonesia and Vietnam while China lags behind       Indonesia                     5.2         3.0              (2.1)
    (7%).                                                               Source: CMIE
•   India enjoys a significant lead in terms of labour cost per hour • Total denim capacity in India has nearly doubled in the last few
    (US$ 0.6 in 2004), over developed countries like US (US$ 15.1)      years, resulting in a prolonged slump in the domestic market.
    and newly industrialised economies like Hong Kong (US$ 5.1),        Most new entrants (largely catering to the unorganised market)
    Taiwan (US$ 7.1), South Korea (US$ 5.7) and China (US$ 0.9).        are incapable of producing export-quality denim and have
    Also, India is rich in traditional workers adept at value-adding    resorted to dumping their produce in the domestic market
    tasks, which could give Indian companies significant margin         resulting in further drop in prices in FY09.
    advantage. However, India's inflexible labor laws have been
    a hindrance to investments in this segment. Unlike in home • The Budget proposed allocations of funds to the scheme for
    textiles, garment capacities are highly fragmented and leading      Integrated Textiles Parks that will facilitate setting up of
    Indian textile companies have been slow to ramp up their            dedicated textile hubs.
    apparel capacities, despite strong order flows from overseas
    buyers who are trying to diversify out of China.                   KEY POINTS

•   Several Indian textile companies have formed alliances with         Supply: The supply of denim has nearly doubled in the last
    their global counterparts, particularly those with strong front-    15 months. Most new capacities in the apparel and home
    end capabilities, in a bid to access global markets, tap            textile segments are not operating at full capacities.
    technological know-how, design skills and branding and
    retailing ability. The alliances have been struck in most cases     Demand: High for premium and branded products due to
    by way of JVs or stake acquisition. Tie-up with overseas            increasing per capita disposable income.
    companies will help them move up the value chain and focus          Barriers to entry: Superior technology, skilled and unskilled
    on the more lucrative branding and retailing business.              labour, distribution network, access to global customers
FY09                                                                    Bargaining power of suppliers: Because of over supply
                                                                        in the unorganised market like that of denim, suppliers have
                                                                        little bargaining power. However, premium products and
•   After reasonable growth in FY07 and FY08, companies in              branded players continue to garner higher margins.
    Indian textile sector bore the brunt of poor domestic sales,
    low export volumes and high raw material costs in FY09.             Bargaining power of customers: Domestic customers -
    Instead of gaining from the rupee's depreciation in the last        Low for premium and branded product segments. Global
    fiscal, companies suffered foreign exchange losses due to           customers- High due to presence of alternate low cost
    their hedging mechanism. Indian textiles companies took             sourcing destinations
    recourse to measures such as replacing US dollar denominated        Competition: High. Very fragmented industry. Competition
    export orders with other currencies, increasing revenue from        from other low cost producing nations is likely to intensify.
    value-added products, and diversifying into other emerging
    export markets.
                                                                        CURRENT SCENARIO AND PROSPECTS
•   Most companies in the sector timed their expansion plans FY04
    onwards, so as to avail themselves of the funding under TUF •        Most large textile companies in India, realising the growth
    (Technology Upgradation Fund, offering loans at 6% subsidy).         potential in domestic retailing, have drawn up aggressive
    This led to the capex-spending phase in the textile sector           strategies to expand their footprint in the domestic market.
    peaking in the last two fiscals. However, with the slump in •        Although home textile companies have recently been
    demand for textile products from the overseas markets, a             aggressive on the capacity expansion front, realisations have
    number of companies had to defer their expansion plans due           remained stable. But as new capacities come on-stream and
    to large under-utilised capacities. With the FY08 Union Budget       utilisation levels pick up, this is unlikely to continue. This is
    allowing the scheme to continue during the 11th plan (2007-          because although India continues to feature amongst the
    2012), the smaller players in the sector would, however,             lowest cost producers for the US and EU markets, competitors
    continue to benefit. We believe that despite lower interest          like Pakistan and Turkey are cannibalising its market share.
    rates, players in the sector would have to wait until the new
                                                                    •    With retailers like Wal-Mart, JC Penney and GAP planning to
    capacities stabilise and the utilisation levels get normalised,
                                                                         substantially increase their outsourcing from India and FDI in
    before leveraging more.
                                                                         single brand retailing making its way into the country, the
•   The global textile industry also faced the brunt of economic         opportunities for domestic apparel exporters are immense. As
    slowdown in FY09, wherein, exports to the US from two of its         per the Government of India targets, while India's textile export
    largest suppliers India and China dipped in terms of value and       is poised to grow from US$ 13 bn (3.3% of world textile trade)
    volumes respectively. While India sustained volumes because          to US$ 50 bn (8.9%) by FY10, at a CAGR of 21%, its share in
    of better product quality as compared to China, it lost out in       apparel and garment exports are set to double and triple
    terms of realizations. Competitors like Vietnam, Bangladesh          respectively until FY10. However, oversupply led pricing
    and Indonesia gained substantially because of relatively lower       pressures and forex losses continue to mar the long-term
    labour costs.                                                        earnings visibility of the textile companies.

				
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posted:11/6/2010
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