The raw material (cotton and polyester) prices declined during the quarter. However, higher minimum support price (MSP) of cotton has increased the cost of manufacturing cotton products.
A volatile rupee has added to the woes of exporters. The government announced a stimulus package for textile players during the quarter, which included the following:
• Fresh allocation of Rs1,400 crore for the entire TUFS backlog
• Interest subvention of 2% on pre and post shipment credit
• Extension of DEPB scheme till December 2009 and increase of rates by 3%
• Other major measures for manufacturing companies and exporters include interest rate cuts, 4% Cenvat rate cut and Export Credit Guarantee Corporation (ECGC) back up.
With the global economic slowdown, the textile industry may face troubles, going ahead. Exports will be hit due to declining imports from US and other countries. On the raw material front, prices of cotton and polyester fibers i.e. PTA and MEG are declining.
However, finished goods prices are also declining due to lower demand resulting in continuous margin pressure. Fixed costs of companies are expected to rise due to lower demand, which will result in lower sales growth.
We believe large companies with huge capacities will be in a better position in such a scenario due to vendor consolidation happening at the buyer’s end. Hence, large exporters with integrated capacities are preferred.
Due to economic uncertainties, buyers are postponing their discretionary spends. So, we are cautious on textile companies with retail outlets.
However, the stimulus packages are expected to provide relief, though marginal, to the sector and enable them to survive against stiff global competition.
We remain NEUTRAL on the sector due to rising cost pressure, volatile rupee and high debt.