The Indian Rupee depreciated by 2% relative to the US$ in the month of September 2017 because of geo-political tensions, the indication by the US Federal Reserve that it may undertake another rate hike in 2017, as well as concerns that a potential fiscal stimulus by the Government of India to boost economic growth may result in a slippage relative to the deficit target for the year. Nevertheless, the Indian Rupee sustained its strong performance against currencies of most of the countries competing in the global textile space during much of the current calendar year, appreciating by ~5% against US$ in 8M CY2017. In comparison, currencies of other key nations competing such as the Vietnamese Dong, the Bangladeshi Taka as well as the Pakistani Rupee depreciated by ~0.5-2% against the US$ during the same period.
It is a well- known fact more than two-thirds of India’s textile exports are dollar-denominated, in line with the dominance of US$ based transactions in India’s total exports more than 85%), a sustained strong performance of Indian Rupee visà- vis US$ has been one of the major causes of concern for the Indian textile exporters in the past one year, as this has made it difficult for exporters to remain price-competitive.
Though the Indian Rupee has depreciated against the Euro, another major currency in which India’s exports are denominated, this needs to be viewed in conjunction with the fact that the extent of depreciation in currencies of peers against Euro has been steeper during the current calendar year.
Considering that China still accounts for a majority of the exports to Europe, while Bangladesh is also a prominent player there, benefitting from a favourable duty structure, the relative currency movement against the Euro is adding to the challenges being faced by Indian exporters. ICRA notes that the extent of volatility has been lower in the past 12- 18 months vis-à-vis the trends witnessed during FY2013 and FY2014 when there were instances of the Indian rupee appreciating against the US$ to a similar extent of 5-7%, but accompanied by higher volatility. A relatively more gradual movement this time has enabled the export-oriented companies to quote reasonably for their orders as well as attempt to renegotiate the contracts, wherever possible, with their key buyers. Further, as per ICRA’s estimates, besides the benefits of natural hedges available on account of foreign currency borrowings, most textile exporters are estimated to have hedged 50-60% of their foreign exchange exposures. In such cases, prudent hedging practices have limited the impact of currency movement on profitability of players in recent quarters. Although ICRA notes the recent depreciation of Indian Rupee vis-à-vis US$, currency trends going forward remain crucial for exporters as a sustained strength of the Indian Rupee against the US dollar may put pressure on their pricing ability and hence demand and profitability .
While the duty drawback rates as per
the earlier regime had been extended
upto September 2017, post the GST
implementation, the Government of
India has recently notified the revised
duty drawback rates under the GST
regime which are applicable to exporters
with effect from October 2017 onwards.
There is a downward revision in duty
drawback rates for most product
categories in the textile sector (with a
few exceptions such as bed/ toilet/
kitchen linen, carpets and curtains)
under the GST regime, when compared
with duty drawback rates for exporters
claiming Cenvat under the earlier tax
regime. Considering that GST aims to
make the process of claiming input
credit seamless and more efficient with
no leakages, the rationale for downward
revision in rates appears to be
expectation of full input credit
availability now in contrast to
inefficiencies prevalent under the earlier
It is, however, pertinent to note that the uneven flow of taxation through the textile value chain under the earlier tax regime, owing to dominance of unorganised players operating under composition scheme of taxation in some segments, used to result in a break in the input credit chain. Accordingly, most exporters used to claim duty drawback at higher rates without claiming Cenvat . As a result, some exporters used to benefit from the higher duty drawback rates, considering the variations in input taxes blocked across the industry and the flat duty drawback rates, which used to support their profitability. With a shift to the GST regime, all players will now be required to claim duty drawback at the rates prescribed after availing input credits. Revision in rates is expected to adversely affect profitability of the companies and is hence facing resistance from the Industry.
Further, in the special textile package approved by the Union Cabinet in June 2016, duty drawback coverage had been enhanced by introducing a scheme to refund the state levies over FY2018-FY2020, with an outlay of Rs. 5,500 crore. Impact of the scheme on profitability of exporters, estimated to the tune of 100-150 bps, was expected to start getting reflected in their performance from FY2018 onwards. Notwithstanding the pressures on profitability witnessed during Q1 FY2018, implementation of this scheme did provide some support to the exporters during Q1 FY2018. However, with a lack of clarity on the status of rebate of state levies, uncertainty with respect to the impact on exporters’ profitability remains.
India’s textile exports, be it in the
form of yarn or end-products (apparels/
home textiles etc.), are predominantly
cotton-based, as reflected in their share
of 70% of India’s total textile exports.
Last year, the domestic prices of cotton
fibre had increased significantly from a
level of Rs 90-92/kg at the beginning of
FY2017 to a peak of Rs. 140/kg in July
2016, driven by the tight stock position
in the domestic market.
With crop output in the previous cotton season starting October 2016 being lower than initial expectations, the cotton prices remained firm at Rs. 120/ kg after a minor correction during Q3’FY2017. Even as the cotton prices continued to hold up till mid September 2017, a pressure on end-product realisations was witnessed due to demand-side pressures in the domestic
Given the increase in cotton prices since the beginning of FY2017, the contribution for domestic spinners (yarn price less cotton price, without adjusting for yield and waste realisation) remained under pressure during the year. Overall, the average contribution level during FY2017 remained at Rs. 75/Kg compared to Rs. 77/Kg in FY2016, Rs. 79/Kg in FY2015 and Rs. 81/Kg in FY2014. Thereafter also, the contribution margins remained range-bound at Rs.77-78/ kg till August 2017, with cotton prices remaining steady. However, a sharp correction to Rs. 68/ kg has been witnessed in the month of September 2017 as continued demand pressures constrained pricing ability of the spinners, while cotton prices corrected only marginally.
A similar trend has been witnessed in costing and profitability of apparel and home textile exporters. This is reflected in an increase in raw material cost as well as other manufacturing costs as a percentage of output, for six companies in ICRA’s sample, to 52% and 31% in Q1 FY2018 from 48% and 29% respectively in the corresponding previous quarter last fiscal (refer Chart 13). An increase in raw material prices vis-à-vis last year together with a decline in realisations on account of currency appreciation resulted in a sharp decline in operating profitability of the sample to ~17% in Q1 FY2018 from ~22% in Q1 FY2017.
The Indian textile exports have
remained stagnant in the past four fiscal
years, after growing at a Compounded
Annual Growth Rate (CAGR) of ~13%
between FY2010 and FY2014 in US
Dollar (US$) terms (refer Chart 3). The
growth between FY2010-FY2014 was
driven by all the key segments including apparels, home textiles and cotton yarns
(accounting for ~46%, 16% and 9% of
Indian textile exports respectively –
refer Chart 2), growing at a CAGR of
9%, 15% and 30% respectively.
However, stagnancy in the recent years
can be attributed primarily to de-growth
in cotton yarn exports, as also the
modest pace of growth in the apparels
segment. While the slowdown in
apparels segment has mainly been on
account of subdued demand trends in
key textile consuming regions of United
States of America (US) and European
Union (EU) (accounting for a majority
of exports from India, refer Charts 4 and 5), the cotton-yarn exports have been
under pressure on account of a decline
in demand from China, which used to
account for more than 40% of the total
cotton yarn exports from India (refer
Chart 6) till last year and accounted for
only ~17% of India’s cotton yarn exports
in 4M FY2018. The challenges have
been further augmented by intense
competitive pressures from other
leading textile exporting nations such as
Vietnam and Bangladesh.