Weak global demand and high interest costs may see more textile firms heading the CDR way
The textile sector has come under stress again. Given that banks have an estimated Rs 140,000 crore exposure to the sector (four per cent of total credit), its health is of particular relevance to the banking industry. Analysts expect more textile companies to head for corporate debt restructuring (CDR) this quarter, though the sector was granted a loan repayment moratorium of 12-18 months in mid-2009. In the first nine months of FY12, textile companies accounted for eight per cent of approved restructured debt.
While 2010-11 was a good year for the industry, the global turmoil in FY12 affected the sector’s recovery. Both industry associations and analysts believe revenues are expected to dip 20-25 per cent (especially in southern India) year-on-year (yoy) on falling cotton prices and weak demand from western economies. This apart, analysts believe the industry relies heavily on interest subsidies offered by the government as part of the Technology Upgradation Fund Scheme and a duty drawback of eight per cent of revenues offered to exporters. Despite the sops, most players in the sector do not have adequate cash flows to service their huge debts. The worst hit are the spinning mills, with their large overheads. The garment makers are relatively better off, claim analysts.
According to CRISIL Research, in the first half of FY12, operating margins of a sample set of garment manufacturing companies fell by 60 basis points yoy to 12 per cent. Profitability was affected, as players were able to pass on only a part of the raw material price increase to end-consumers. However, spinning companies were the worst hit, as demand started decelerating and cotton prices nearly doubled. In the first half of FY12, operating margins of spinning companies plummeted to five per cent. Domestic demand, which constitutes 57 per cent of total demand for yarn in 2011-12, will continue to be the main driver, even in future. However, CRISIL expects demand for cotton yarn to grow at a modest 4.5-5.5 per cent over the next five years.
According to one brokerage, the spinning segment of the industry is the worst affected, given the overcapacity, high debt (debt-equity ratio of 2.5 times), low asset turnover, high financial leverage and inadequate cash-flows to repay debt. Industry players believe a third of the industry, especially the highly leveraged companies, could face closure over the ensuing 12 months posing high default risk for the lenders. Of the 240 spinning companies operating across India, 150 have reported losses till December 2011. The fourth quarter is not expected to be any better.