Bangladesh Imports Could Hurt Recovery Prospects Of Textile Firms.

An unexpected move by the Indian government to allow duty-free access to 48 apparel products from Bangladesh has jolted the domestic textile industry. The move is ill-timed for many reasons.

One, the Indian garment and yarn makers are already battling against sluggish exports due to demand contraction in key export markets such as the US and Europe.

The off-take of garments and yarn in domestic markets is not as buoyant as a year ago. Allowing free imports would only aggravate the problem of slower sales growth as it would mean stiff competition for Indian products.

Reports suggest that these apparel products attract around 20% duty at present. Also, they are around 20-25% cheaper than Indian apparels, as Indian firms lack the economies of scale that Bangladesh firms have; costs of labour and power are far lower than in India.

The imports would thus mean stiff competition for Indian garment firms on the pricing front, though some industry watchers are hopeful that quality and the brand equity of Indian goods will help the firms hold out.

With the garment industry taking a beating, the entire value chain could be hit. Industry watchers feel that domestic demand for yarn will also decline.

Although the June quarter saw higher net sales, compared with a year ago, most mills’ profits were lower as they were saddled with a high cost inventory of cotton, the chief raw material.

Mark-to-market losses of inventory, despite lower prevailing cotton prices, dragged down operating profit. For example, large integrated firms such as Vardhaman Textiles Ltd (VTL) posted one-third the operating profit of the year-ago period. Operating profit margin was down to the lowest in about eight quarters at around 3%.

Some such as KPR Mills Ltd and branded garment companies such as Celebrity Fashions Ltd (CFL) posted operating losses.

The grim near-term outlook is reflected in the textile stocks—be it KPR, Vardhaman Textiles or Celebrity Fashions. They have underperformed guages such as the BSE mid-cap index on the BSE and its benchmark Sensex.

The only ray of hope amid the challenges is that while yarn prices have softened, cotton prices, too, are cooling off; they’re lower by around 40% from their peaks. Estimates of record world cotton output this season suggest improving profitability for mills as they rid themselves of high-cost inventory.

But the government move to allow apparel imports from Bangladesh could retard recovery throughout the textile value-chain.

Source :livemint.com