Textiles Sector Analysis Report

The Indian textile industry contributed about 14% to industrial production, 4% to the
country's GDP and 17% to the country's export earnings in 2010. It provides direct
employment to over 35 m people and is the second largest provider of employment after
agriculture.

As per Technopak, most developed countries will see continued decline of their textile
and apparel industry and create fresh opportunity of up to US$ 140 bn for exports for
developing countries by 2020.

According to the Textile ministry, Indian textile industry is expected to more than double
to US$ 115 bn by 2012. The domestic market is likely to increase from US$ 34.6 bn to
US$ 60 bn by 2012. India's share of global textile exports is expected to increase from
the current 4% to around 7% over the next three-years. According to the Textile
Association of India (TAI), the denim manufacturing capacity, which stands at 600-650
m metres per annum, is set to witness an addition by another 100 m metres wherein
70% focus will be on the domestic market.

India enjoys a significant lead in terms of labour cost per hour (US$ 0.6 in 2004), over
developed countries like US and newly industrialised economies like Hong Kong,
Taiwan, South Korea and China. Also, India is rich in traditional workers adept at value-
adding tasks, which could give Indian companies significant margin advantage. However,
India's inflexible labor laws have been a hindrance to investments in this segment.
Unlike in home textiles, garment capacities are highly fragmented and leading Indian
textile companies have been slow to ramp up their apparel capacities, despite strong
order flows from overseas buyers who are trying to diversify out of China.

The textile industry aims to double its workforce over the next 3 years. As a thumb rule,
for every Rs1 lac invested in the industry, an average of 7 additional jobs is created.

Key Points

Supply: The supply of denim has nearly doubled in the last 15 months. Most new
capacities in the apparel and home textile segments are not operating at full capacities.

Demand: High for premium and branded products due to increasing per capita
disposable income.

Barriers to entry: Superior technology, skilled and unskilled labour, distribution

network, access to global customers

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
branded players continue to garner higher margins.

Bargaining power of customers:

Domestic customers - Low for premium and branded product segments.

Global customers- High due to presence of alternate low cost sourcing destinations.

Competition: High. Very fragmented industry. Competition from other low cost
producing nations is likely to intensify.

Financial Year '11

Most companies in the sector timed their expansion plans FY04 onwards, so as to avail
themselves of the funding under TUF (Technology Upgradation Fund, offering loans at
6% subsidy). This led to the capex-spending phase in the textile sector peaking in the
last three fiscals. However, with the slump in demand for textile products from the
overseas markets, a number of companies had to defer their expansion plans due to
large under-utilised capacities. With the government rejecting the proposal to continue
the TUF scheme beyond the 11th plan (2007- 2012), the players looking to defer their
capex plans will be hit. We believe that with higher interest rates, players in the sector
would prefer to see the utilisation levels get normalised, before leveraging more for
incremental capex.

The global textile industry also faced the brunt of economic slowdown in FY11, wherein,
exports to the US from two of its largest suppliers India and China dipped in terms of
value and volumes respectively. While India sustained volumes because of better
product quality as compared to China, it lost out in terms of realizations. Competitors
like Vietnam, Bangladesh and Indonesia gained substantially because of relatively lower
labour costs.

Troubled by the rupee's appreciation against the US dollar, thereby eroding their
competitiveness in the global market, textile exporters have demanded duty benefits
and credit at lower interest rates.

According to the data from the ministry of textiles, cotton prices for medium-long
variety have escalated by 36% and for long variety by as much as 69% in the last one
year. In contrast, prices of cotton yarn have increased by just 14 to 35%. The rise in key
input prices has dealt a heavy blow to the operating margins of textile manufacturers.

Prospects

Most large textile companies in India, realising the growth potential in domestic
retailing, have drawn up aggressive strategies to expand their footprint in the domestic
market. These include companies like Welspun and Himatsingka, which were
traditionally export-oriented, as also Raymond, which has been the pioneer in domestic
textile retailing.
In addition to high raw material costs, an appreciating rupee and an increase in
employee's dearness allowance and shortage of labour are burning a hole in textile
company's pockets

Although home textile companies have recently been aggressive on the capacity
expansion front, realisations have remained stable. But as new capacities come on-
stream and utilisation levels pick up, this is unlikely to continue. This is because
although India continues to feature amongst the lowest cost producers for the US and
EU markets, competitors like Pakistan and Turkey are cannibalising its market share.
Moreover, with the possibility of slowdown in the western economies looming large, a
slowdown in demand cannot be ruled out.

With retailers like Wal-Mart, JC Penney and GAP planning to substantially increase their
outsourcing from India and FDI in single brand retailing making its way into the country,
the opportunities for domestic apparel exporters are immense. As per the Government
of India targets, while India's textile export is poised to grow at an average annual rate
of 15 to 20% over the next three years, its share in apparel and garment exports are set
to double and triple respectively until FY15. However, oversupply led pricing pressures
and forex losses continue to mar the long-term earnings visibility of the textile
companies.

India and China are currently competing in the same categories (premium segment) of
apparels and home textiles and given India's established presence in the high end
segment, India could gain significant market share in US apparel imports. However, the
ongoing economic slowdown in the US could result in lower orders from US retailers
that, in turn, may result in lower capacity utilisation and impact profitability of textile
companies in India.

Caught on the wrong foot for alleged use of child labour and forced labour, Indian
apparel exporting industry has not been able to convince the US about its seriousness in
eliminating labour abuse from the sector. The Indian textile industry that directly
employs 6 m workforce to make apparel for the world's best brands is feared to find
mention in the Trafficking Victims Protection Reauthorisation Act (TVPRA List).