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India Ratings and Research (Ind-Ra) in a report said the fall in consumer income and increase in household leverage will continue to have a negative sentiment through FY21.
While India’s dependency on imports is limited, it is dependent on exports and hence, the return of demand from the key markets including the US, the UK, the UAE and China is critical.
The EBITDA (earnings before interest, taxes, depreciation and amortisation) will drop at least 15 per cent in FY21 across its textile portfolio, the report said.
Further, it said the COVID-19 pandemic is likely to continue to impact the global textile production and supply chains and thereby textile product prices.
The Indian textiles industry has taken a major hit because most of Indian yarn exports are to China, it added.
The agency estimated that India’s exports will be substantially hit till the first half of FY21, which had already reduced by more than 40 per cent till January 2020 due to the US-China trade war.
Meanwhile, it revealed that cotton prices continued to soften in February 2020, due to lower export demand and squeezed domestic consumption.
They fell to Rs 111 per kg in February 2020, compared to Rs 118 in the same month in 2019, on account of reduced offtake by mill owners, which are facing the heat of excess production and supply disruptions amid the spread of COVID-19.
However, the Cotton Corporation of India continues to hold up the stock (40 per cent of total arrivals) and would maintain the current prices over the short term.
While in the long term, a higher uncertainty regarding the duration of lockdown would be negative for the prices and pressure the liquidity of cotton spinners who are holding a cotton inventory of three to four months.
The cotton yarn industry continues to face a subdued export demand.
With the sudden lockdown of the global market and lack of incremental orders from China, yarn players have begun to face pressure on liquidity, despite the softening of cotton prices.
This has led to an oversupply in the domestic market which has impacted yarn prices, while the demand is not likely to improve owing to the lockdown in India and other export destinations, the opening of factories in China could be a light in the dark for these players, it added.
The majority of downstream players had to incur inventory losses due to the ongoing geo-political tensions in crude oil which led to the prices declining by more than 40 per cent month-in-month in March 2020.
The losses are unlikely to be passed on till the short term.
However, lower working capital requirements and reduced raw material costs could improve the margins of the man made fibre industry in the medium term.
However, lower raw material availability (purified terephthalic acid) from China amid the COVID-19 led disruptions could lead to a steady increase in domestic prices.
The fabric industry registered a marginal improvement in exports in 10 month of FY20, coupled with lower raw material costs and increased export demand from Bangladesh and other countries.
However, Ind-Ra said, beginning February, the industry is facing a downfall with reduced domestic demand, leading to inventory piling up.
The fabric industry is dominated by few players which have strong liquidity to manage the downside caused by COVID-19, while small and medium-size players would face the brunt of economic lockdown, it added. SM MKJ
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