Textile and apparel exporters' earnings and EBITDA margins will be impacted in the near term due to the Indian rupee's 5 per cent appreciation against the dollar in 2017 year to date and weak apparel imports from markets such as US and UK, says a recent report. The on-going strength of the INR vs USD constrains the price competitiveness of textile exporters.
Apparel exporters' value-added garments mix, partially hedged forex exposure, debt-light structure and reasonable liquidity support the overall business and financial risk profile, according to India Ratings and Research (Ind-Ra). Furthermore strong domestic foothold of large spinners and weavers will mitigate any major impact on their business and credit risk profile.
Unabated strengthening of INR vis a vis USD in the current calendar year has added to the challenges of the textiles industry. Ind-Ra had highlighted in the report ‘Stable Input Prices, Fiscal Incentives to Support Textile and Cotton in FY18’ the muted performance in 3QFY17 due to high cotton prices (17 per cent higher prices yoy), demonetisation and slow global trade. The easing of liquidity over February – March 2017 propelled a recovery in production output and export volumes; however Ind-Ra believes export realisations will get dented due to the strong rupee.
More than 70 per cent of Indian textile and apparel exports are dollar denominated. Strong INR vs USD is likely to have an adverse impact on the export trade volumes and earnings, since fresh export orders will have reduced competitiveness. As on date, INR has strengthened by more than 5 per cent in 2017, while there has been negligible or a favourable movement of 1 per cent, 0.5 per cent and -1 per cent for major competing nations namely China, Bangladesh and Vietnam respectively.
Ind-Ra estimates that INR realisations will shrink by 3-5 per cent in the near term and hence would impact the profitability of the companies across the textile value chain. Ind-Ra believes that this may offset some of the gains which will accrue from the government of India's export stimulus package, GST implementation and USA's exit from the Trans Pacific Partnership.
Ind-Ra believes that export-oriented apparel manufacturers with unhedged receivable positions will hurt the most, due to their geographically concentrated (US and Europe) earnings profile, low market share and restricted bargaining power with their global clients. Ind-Ra expects EBITDA margin erosion of around 150bp yoy in 4QFY17.
Earnings and EBITDA margins of Ind-Ra rated large spinners and weavers will be relatively less impacted due to their diverse earnings profile, coupled with cost and quality leadership of their products. While domestic demand has recovered from the negative impact of demonetisation, however strong cotton prices coupled with increased price competitiveness of imported yarn and fabric will pressurise margins. Thus balance sheet deleveraging over FY17-FY18 may not be met fully, due to the likely shortfall in operating profits.
Source: fibre2fashion.com