Home Textiles Makers’ Revenue And Profitability To Rebound This Fiscal
Improved operating performance to keep credit outlook stable despite moderate capex
Revenue of the home textile industry is set to rise 7-9% this fiscal after a ~15% fall last fiscal, as India regains global share following a correction in domestic cotton prices and restocking by big-box retailers in major markets abroad.
The industry’s operating profitability will improve 150-200 basis points to 14.0-14.5%, due to lower raw material cost and better operating leverage, but it will still hover below the pre-pandemic levels.
Credit profiles will continue to be stable, with the ongoing capital expenditure (capex) cycle in its last leg this fiscal, and healthy cash accruals – driven by improved revenue growth and profitability – keeping leverage in check.
These estimates are based on CRISIL Ratings analysis of 40 companies, which accounted for 40-45% of the sector’s revenue.
As much as 70-75% of the industry’s revenue is from exports, with the US, its biggest market, accounting for more than half of it.
After strong headwinds in exports last fiscal, the home textile industry is on the road to recovery. Domestic cotton prices, which had risen past international prices and reached Rs 1 lakh per candy in May 2022, have now retracted to ~Rs 55,000 (chart 1 in annexure), helping India regain competitiveness. Moreover, orders from big-box retailers in the US will increase this fiscal as the inventory piled up last fiscal depletes on easing global supply-chain challenges and the gradual sales recovery being seen over the past few months.
Mohit Makhija, Senior Director, CRISIL Ratings, says, “With domestic prices of raw material gaining competitiveness vis-à-vis international levels, restocking by big-box retailers in the US and sustained China+1 policy of global buyers, revenue is set to rebound for export-oriented Indian home textile makers this fiscal – albeit on a low base. This is reflected in the recent increase in India’s share in home textile imports by the US (including key home textiles products exported by India) to 47% during January-June this year (chart 2 in annexure) after falling to 44% in CY2022 from 48% in CY2021.”
But capacity utilisation will improve slowly because of the recent large capacity addition amid moderate demand growth. That will continue to keep operating margins below pre-pandemic levels.
The industry is in the midst of Rs ~4,000 crore capex, planned to be completed between fiscals 2022 and 2024.
Says Gautam Shahi, Director, CRISIL Ratings, “With only ~25% of the capex remaining to be completed this fiscal, debt is unlikely to increase substantially. That, along with improved operating performance and cash accrual, will keep debt metrics stable in the current fiscal. Consequently, gearing is seen improving to 0.70-0.75 times as on March 31, 2024, as against 0.8 times a year earlier. Interest coverage will improve to 4.8-5.0 times this fiscal versus ~4 times last fiscal 2023.”
That said, any significant slowdown in the key export market of the US and surge in domestic cotton prices compared with international prices will be the key monitorables.