Fitch Outlook
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Corporates
l
Other India Special Report
Indian Textile and Clothing – Outlook 2008
Analysts
Overview
Roopa Raman +91 44 2432 2349 [email protected]
While revenue of Textile and Clothing (T&C) companies has been increasing in 2007, rising cotton prices and the sharp appreciation of the Indian rupee against the US dollar have acted as dampeners. Fitch expects T&C export volumes to be maintained in 2008, coupled with stable domestic demand for the sector. However, the decreasing realisations for exports denominated in US dollars, together with firm cotton prices and increasing international competition, could affect T&C profit margins in 2008, leading to a negative overall outlook for companies in the Indian T&C industry.
Rakesh Valecha +91 22 4000 1740 [email protected]
T&C Exports With the appreciation of the rupee against the dollar in 2007, Indian T&C exporters have been faced with decreased rupee revenues and increased international competition. T&C companies will need to adopt hedging strategies to counter this currency factor, which may include billing in other currencies and dollar‐ denominated borrowings. Given India’s strong economic growth and the increasing inroads made by the ‘organised’ retail industry, larger T&C companies may look at increasing their presence in the domestic T&C market. T&C companies that have made acquisitions of companies and brands abroad or have manufacturing bases outside India would be in a better position to manage the appreciation of the rupee and face international competition. According to the Office of Textiles and Apparel (OTEXA) of the USA; against a 9% increase in India’s T&C exports (in dollar terms) to the USA in 2006, the growth in the first 10 months of 2007 has been 2%, with apparel exports having grown by 0.6% and non‐apparel exports by 4.5%. Meanwhile, Chinese T&C exports to the USA (in dollar terms), after a 20% growth in 2006, have increased 23.7% in the first 10 months of 2007, with 28.9% growth in apparel exports and 12.6% growth in non‐ apparel exports. The safeguards imposed by the USA on imports of specific T&C products from China are set to expire at the end of 2008. With the import quotas imposed by the European Union (EU) on specific T&C products from China in 2005 expiring at the end of 2007, and to be replaced instead by a joint monitoring system, Indian exports to the EU may face increased competition. Given these factors, while Fitch expects that Indian T&C exports in 2008 will remain fairly stable in volume terms, realisations could come under pressure.
Cotton Production and Prices The Cotton Corporation of India has estimated India’s cotton production in 2007‐08 at around 30 million bales, compared with around 27 million bales in 2006‐07. According to the National Cotton Council of America, US production of cotton is expected to decline from 21.6 million bales in 2006‐07 to 18.9 million bales in 2007‐ 08. World consumption of cotton, however, is expected to increase, and Fitch expects demand from China to remain strong in 2008. The higher international prices and demand for cotton, in light of the lower world production in 2007‐08 (estimated by the International Cotton Advisory Committee to be about 117 million bales as against 119 million bales in 2006‐07), would contribute to fairly firm cotton prices in India, despite the higher domestic production.
www.fitchratings.com
31 January 2008
Corporates Profit Margins to Decline; Cash Flow could be under Pressure Given the continuing appreciation of the rupee against the dollar, and the general competitive scenario in the global T&C industry, profit margins could decline in 2008. Coupled with declining rupee inflows from exports, and with several T&C companies having taken long‐term rupee‐denominated debt under the Technology Upgradation Fund Scheme (TUFS), this could strain cash flows in 2008. Given the extended repayment periods available for debt under the TUFS scheme, the financial leverage (total debt/EBIDTA) in 2008 should continue to remain high for most T&C companies. As in the past, Fitch expects the capex plans for a majority of T&C companies to be funded predominantly by debt.
Government Support TUFS to Continue, but Scale of Capex may be Lower The Government of India has decided to continue the TUFS from November 2007 until March 2012, albeit with a lower reimbursement for the spinning segment. Further incentives, such as subvention on interest paid on pre‐ and post‐shipment credit, and revision in drawback rates and Duty Entitlement Pass Book rates have also been introduced. While the TUFS scheme would help the T&C industry continue its expansion and modernisation, the scale of capex in 2008 could be lower on account of already‐ high financial leverage.
Copyright © 2008 by Fitch, Inc., Fitch Ratings Ltd. and its subsidiaries. One State Street Plaza, NY, NY 10004.Telephone: 1‐800‐753‐4824, (212) 908‐0500. Fax: (212) 480‐4435. Reproduction or retransmission in whole or in part is prohibited except by permission. All rights reserved. All of the information contained herein is based on information obtained from issuers, other obligors, underwriters, and other sources which Fitch believes to be reliable. Fitch does not audit or verify the truth or accuracy of any such information. As a result, the information in this report is provided "as is" without any representation or warranty of any kind. A Fitch rating is an opinion as to the creditworthiness of a security. The rating does not address the risk of loss due to risks other than credit risk, unless such risk is specifically mentioned. Fitch is not engaged in the offer or sale of any security. A report providing a Fitch rating is neither a prospectus nor a substitute for the information assembled, verified and presented to investors by the issuer and its agents in connection with the sale of the securities. Ratings may be changed, suspended, or withdrawn at anytime for any reason in the sole discretion of Fitch. Fitch does not provide investment advice of any sort. Ratings are not a recommendation to buy, sell, or hold any security. Ratings do not comment on the adequacy of market price, the suitability of any security for a particular investor, or the tax‐exempt nature or taxability of payments made in respect to any security. Fitch receives fees from issuers, insurers, guarantors, other obligors, and underwriters for rating securities. Such fees generally vary from US$1,000 to US$750,000 (or the applicable currency equivalent) per issue. In certain cases, Fitch will rate all or a number of issues issued by a particular issuer, or insured or guaranteed by a particular insurer or guarantor, for a single annual fee. Such fees are expected to vary from US$10,000 to US$1,500,000 (or the applicable currency equivalent). The assignment, publication, or dissemination of a rating by Fitch shall not constitute a consent by Fitch to use its name as an expert in connection with any registration statement filed under the United States securities laws, the Financial Services and Markets Act of 2000 of Great Britain, or the securities laws of any particular jurisdiction. Due to the relative efficiency of electronic publishing and distribution, Fitch research may be available to electronic subscribers up to three days earlier than to print subscribers.
Indian Textile and Clothing – Outlook 2008 January 2008
2
l
Other India Special Report
Indian Textile and Clothing – Outlook 2008
Analysts
Overview
Roopa Raman +91 44 2432 2349 [email protected]
While revenue of Textile and Clothing (T&C) companies has been increasing in 2007, rising cotton prices and the sharp appreciation of the Indian rupee against the US dollar have acted as dampeners. Fitch expects T&C export volumes to be maintained in 2008, coupled with stable domestic demand for the sector. However, the decreasing realisations for exports denominated in US dollars, together with firm cotton prices and increasing international competition, could affect T&C profit margins in 2008, leading to a negative overall outlook for companies in the Indian T&C industry.
Rakesh Valecha +91 22 4000 1740 [email protected]
T&C Exports With the appreciation of the rupee against the dollar in 2007, Indian T&C exporters have been faced with decreased rupee revenues and increased international competition. T&C companies will need to adopt hedging strategies to counter this currency factor, which may include billing in other currencies and dollar‐ denominated borrowings. Given India’s strong economic growth and the increasing inroads made by the ‘organised’ retail industry, larger T&C companies may look at increasing their presence in the domestic T&C market. T&C companies that have made acquisitions of companies and brands abroad or have manufacturing bases outside India would be in a better position to manage the appreciation of the rupee and face international competition. According to the Office of Textiles and Apparel (OTEXA) of the USA; against a 9% increase in India’s T&C exports (in dollar terms) to the USA in 2006, the growth in the first 10 months of 2007 has been 2%, with apparel exports having grown by 0.6% and non‐apparel exports by 4.5%. Meanwhile, Chinese T&C exports to the USA (in dollar terms), after a 20% growth in 2006, have increased 23.7% in the first 10 months of 2007, with 28.9% growth in apparel exports and 12.6% growth in non‐ apparel exports. The safeguards imposed by the USA on imports of specific T&C products from China are set to expire at the end of 2008. With the import quotas imposed by the European Union (EU) on specific T&C products from China in 2005 expiring at the end of 2007, and to be replaced instead by a joint monitoring system, Indian exports to the EU may face increased competition. Given these factors, while Fitch expects that Indian T&C exports in 2008 will remain fairly stable in volume terms, realisations could come under pressure.
Cotton Production and Prices The Cotton Corporation of India has estimated India’s cotton production in 2007‐08 at around 30 million bales, compared with around 27 million bales in 2006‐07. According to the National Cotton Council of America, US production of cotton is expected to decline from 21.6 million bales in 2006‐07 to 18.9 million bales in 2007‐ 08. World consumption of cotton, however, is expected to increase, and Fitch expects demand from China to remain strong in 2008. The higher international prices and demand for cotton, in light of the lower world production in 2007‐08 (estimated by the International Cotton Advisory Committee to be about 117 million bales as against 119 million bales in 2006‐07), would contribute to fairly firm cotton prices in India, despite the higher domestic production.
www.fitchratings.com
31 January 2008
Corporates Profit Margins to Decline; Cash Flow could be under Pressure Given the continuing appreciation of the rupee against the dollar, and the general competitive scenario in the global T&C industry, profit margins could decline in 2008. Coupled with declining rupee inflows from exports, and with several T&C companies having taken long‐term rupee‐denominated debt under the Technology Upgradation Fund Scheme (TUFS), this could strain cash flows in 2008. Given the extended repayment periods available for debt under the TUFS scheme, the financial leverage (total debt/EBIDTA) in 2008 should continue to remain high for most T&C companies. As in the past, Fitch expects the capex plans for a majority of T&C companies to be funded predominantly by debt.
Government Support TUFS to Continue, but Scale of Capex may be Lower The Government of India has decided to continue the TUFS from November 2007 until March 2012, albeit with a lower reimbursement for the spinning segment. Further incentives, such as subvention on interest paid on pre‐ and post‐shipment credit, and revision in drawback rates and Duty Entitlement Pass Book rates have also been introduced. While the TUFS scheme would help the T&C industry continue its expansion and modernisation, the scale of capex in 2008 could be lower on account of already‐ high financial leverage.
Copyright © 2008 by Fitch, Inc., Fitch Ratings Ltd. and its subsidiaries. One State Street Plaza, NY, NY 10004.Telephone: 1‐800‐753‐4824, (212) 908‐0500. Fax: (212) 480‐4435. Reproduction or retransmission in whole or in part is prohibited except by permission. All rights reserved. All of the information contained herein is based on information obtained from issuers, other obligors, underwriters, and other sources which Fitch believes to be reliable. Fitch does not audit or verify the truth or accuracy of any such information. As a result, the information in this report is provided "as is" without any representation or warranty of any kind. A Fitch rating is an opinion as to the creditworthiness of a security. The rating does not address the risk of loss due to risks other than credit risk, unless such risk is specifically mentioned. Fitch is not engaged in the offer or sale of any security. A report providing a Fitch rating is neither a prospectus nor a substitute for the information assembled, verified and presented to investors by the issuer and its agents in connection with the sale of the securities. Ratings may be changed, suspended, or withdrawn at anytime for any reason in the sole discretion of Fitch. Fitch does not provide investment advice of any sort. Ratings are not a recommendation to buy, sell, or hold any security. Ratings do not comment on the adequacy of market price, the suitability of any security for a particular investor, or the tax‐exempt nature or taxability of payments made in respect to any security. Fitch receives fees from issuers, insurers, guarantors, other obligors, and underwriters for rating securities. Such fees generally vary from US$1,000 to US$750,000 (or the applicable currency equivalent) per issue. In certain cases, Fitch will rate all or a number of issues issued by a particular issuer, or insured or guaranteed by a particular insurer or guarantor, for a single annual fee. Such fees are expected to vary from US$10,000 to US$1,500,000 (or the applicable currency equivalent). The assignment, publication, or dissemination of a rating by Fitch shall not constitute a consent by Fitch to use its name as an expert in connection with any registration statement filed under the United States securities laws, the Financial Services and Markets Act of 2000 of Great Britain, or the securities laws of any particular jurisdiction. Due to the relative efficiency of electronic publishing and distribution, Fitch research may be available to electronic subscribers up to three days earlier than to print subscribers.
Indian Textile and Clothing – Outlook 2008 January 2008
2
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