With volumes on the mend, will 2019 mark a turnaround for textiles exporters?

The year is ending on a positive note for home textile exporters. Retail sales in the US are the strongest in years this holiday season, reports The Wall Street Journal. And the latest data shows a continued recovery in India’s exports to the US.

India’s market share in home textile exports to the US in October, the latest month for which the data is available, increased one percentage point from the year ago to 33%, data compiled by JM Financial Institutional Securities Ltd show. This is the second consecutive month of market share gains. The gains come after a period of business disruption.

Transition to the online marketplace and the resultant reorganisation at the traditional retailers had led to inventory destocking. This impacted the sales of the Indian textile exporters, weighing on earnings and shares of the companies. The impact was accentuated by the reduction in the duty drawback rates (lowered concessions) for most textile product categories under the goods and service tax.

But heading into 2019, some of these headwinds are already easing. One is the recovery in export volumes. “After a weak start in 2018, India’s exports to the US (in the US dollar terms) in terry towels/cotton sheets have witnessed strong recovery with YoY growth of 24.2%/7.2% (in the past three months),” analysts at JM Financial said.

Second is the revision of the duty drawback rates which will help exporters claim more incentives, strengthening their competitive advantage.

“The recent revisions in duty drawback rates are expected to be marginally positive for the profitability and competitiveness of most segments of the Indian textile exporters,” ratings agency Icra Ltd said in a note.

“This is more so, given that export incentives are seen to have a meaningful contribution in the operating profits of textile exporters.”

Third and another key important variable is cotton prices which began easing, tracking the arrival of new crop. The softening of headwinds should aid the companies’ earnings in the New Year.

“a) Extension of merchandise exports from India scheme (4% export benefit), b) Increase of duty drawback up to 0.6 percentage points across home textile products, c) Rupee depreciation and d) settling of market place disruption in the US are a welcome relief to the textile space,” analysts at JM Financial add.

Even so, much depends on the earnings trajectory. Here there is a question mark. According to an analyst with a domestic broking firm most companies have hedged their currency positions for the current fiscal, limiting the benefits from the rupee depreciation. So any meaningful impact of the above mentioned factors will only be visible from next fiscal, i.e. from the April-June 2019 quarter onwards. Also, the recent uptick in exports may have been helped by inventory stocking ahead of the holiday season. How sales trend and currency movement will be crucial for the stocks and earnings.