Rupee Depreciation and Textile Industry

Macro Economics

Prabodh UpadhyayPralhad JoshiPraveen PPushkar Choudhary

The recent rupee depreciation has enabled the Indian textile

industry to hold yarn prices and also increase yarn exports

Though Indian industry demonstrates stronger backward linkages, low labour costs have enabled countries like Bangladesh, Pakistan and Vietnam to overtake India in terms of capturing textile export markets

With Chinese Yuan appreciating, Indian exports have become more competitive. Indian textile export share is marginal (5% as compared to China’s 30%)

As a CEO of leading textile manufacturer, you are planning to go in for capacity expansion. Capacity expansion necessitates funding and thus you approach a consortium of banks. Prepare the detailed projections convincing the bankers how the global economic trends portray well for Indian textile exporters.

Caselet

The Indian textile industry is one of the major sectors of

Indian economy and contributes almost 14 per cent of India’s industrial production, 4 per cent of National GDP and almost 17 per cent of India's export earnings

As per the annual report 2010-11 of Ministry of Textiles, the size of Indian textile sector is reached up to USD 55 billion

India has the potential to increase its textile and apparel share in the world trade from the current level of 4.5 per cent to 8 per cent and reach US$ 80 billion by 2020

Exports of textile grew to USD 26.8 billion in FY 2010 from USD 17.6 billion in FY 2006. India’s textile trade is dominated by exports with a CAGR of 6.3 per cent during the same period

Overview

According to the Confederation of Indian Textile industry, the continuous rupee depreciation has been profitable for many textile and apparel exporters in the country

Textile buyers from the US and EU are tempted to shift orders from China, Bangladesh and Vietnam to India thanks to the increased competitiveness of Indian exporters thanks to a weaker local currency

Robust demand• Increased penetration of organised retail, favourable demographics

and rising income level to drive textile demand• Growth in building and construction will continue to drive demand

for non-clothing textiles

Competitive Advantage• Abundant availability of raw materials such as cotton, wool, silk and

jute and skilled workforce has made India a sourcing hub

Advantage India

Increasing investments

• Over USD35 billion of investments have been made in the

textile & clothing sector during the last four years, with the

cotton textile segment accounting for around 75 per cent

Policy support

• 100 per cent FDI through the automatic route is allowed in

the Indian textile sector SITP was approved in July 2005 to

facilitate setting up of textiles parks with world class

infrastructure facilities

Market Value: USD220 billion

Advantage India

Notable trends in the Indian textile sector

• The Ministry of Textiles is encouraging investments through increasing focus on schemes such as TUFS & TMC and cluster development activities

Increasing investment in TUFS & TMC

• The Ministry of Textiles commenced an initiative to establish institutes under the public-private partnership (PPP) model to encourage private sector participation in the development of the industry

Public-Private Partnership (PPP)

Technical textiles

• Technical textiles, growing at around twice the rate of textiles for clothing applications, now account for more than half of total textile production

Strong demand & policy support driving investments

Growing demand

Rising demand in exports

Increasing demand in domestic market

Policy support

100 per cent FDI in textile

sector

Government setting up

SITPs

Growing population

driving textile

demand

Increasing loans under

TUFS

Increasing investment

s

Growing domestic and

foreign investments

Commitment of USD140 billion of foreign

investments

Inviting Resulting in

M&A scenario – details

Period: 1 January 2000 to 30 June 2011

Top 5 deals

Acquirer Name Target Name Largest deal (USD mn)

1 Krishnaa Glass Pvt Ltd Soma Textiles & Inds Ltd

6001.5

2 AAA United BV Bombay Rayon Fashions Ltd

968.0

3 BR Machine Tools Pvt Ltd

Bombay Rayon Fashions Ltd

721.1

4 Group of investors Provogue (India)Ltd 526.9

5 Spentex Industries Ltd Indo Rama Textiles Ltd 447.6

Foreign investments flowing in; M&A activity up

→From January 2000 to June 2011, 482 M&A deals have taken place →The top five M&A deals* are listed above

Foreign investments flowing in; M&A activity up

FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY110

20

40

60

80

100

120

140

160

180

200

5

54

9

40

90

130

190

160

140129

→ FDI in the textile industry stood at USD 129 million in FY11

→ CAGR of FDI in the sector during the period was 60.3 per cent

**Growing FDI in textile industry (In USD million)

OpportunitiesImmense growth

potentialPrivate sector

participation in silk production

Technical textiles

The Indian textile industry is set for strong growth, buoyed by both strong domestic consumption as well as export demand

The Central Silk Board has set a target of 28,000 tonnes of raw silk production by 2012–13

Technical textile market estimated at USD12 billion in 2012

For the near term (2012), the sector is valued at USD110 billion by the Confederation of Indian Textile Industry (CITI)

To achieve these targets, alliances with the private sector, especially major agro-based industries in pre-cocoon and post-cocoon segments, is being encouraged

India’s technical textile industry is mainly dominated by unorganised players. However, it is an emerging area for investment with good growth potential

Estimates put the sector market value at USD 220 Billion by 2020

The market is likely to grow to USD31 billion by 2020, implying a CAGR of 10 per cent

OpportunitiesRetail sector offers growth potential

Centres of Excellence (CoE) for research and

technical training

Foreign investments

With consumerism and disposable income on the rise, the retail sector has experienced a rapid growth in the past decade with several international players like Marks & Spencer, Guess and Next having entered Indian market

The CoEs are aimed at creating testing and evaluation facilities as well as developing resource centres and training facilities. Further fund support would be provided for appointing experts to develop these facilities

The government is taking initiatives to attract foreign investments in the textile sector through promotional visits to countries such as Japan, Germany, Italy and France

The organised apparel segment is expected to grow at a compound annual growth rate (CAGR) of more than 13 per cent over a 10-year period

Existing four CoEs, BTRA for Geotech, SITRA for Meditech, NITRA for Protech and SASMIRA for Agrotech, would be upgraded in terms of development of incubation centre and support for development of prototypes

Impact of Union Budget 2012 - 2013

Budget proposals

Impact on the industry

Hike in standard excise duty from 1%, 5% and 10% to 2%, 6% and 12% on various items

• The hike in excise duty on cotton-based products from 5% to 6% is not expected to have any significant negative impact on cotton textile players since the excise duty on cotton-based products is concessional and optional.

• The hike in excise duty on textile products other than cotton-based products from 10% to 12% is expected to increase the cost of production for non-cotton textile players.

Hike in excise duty on branded readymade garments from 10% (with 55% abetment) to12% (with 70% abetment)

• The hike in excise duty on branded readymade garment from 10% to 12% coupled with an increase in abetment from 55% to 70% would result in a net decline in effective excise duty from 4.5% to 3.6% which is expected to result in marginal benefit to readymade garment manufacturers.

• With falling cotton prices and proposed reduction in effective excise duty, the prices of cotton-based branded readymade garments is expected to come down which would lead to boost in demand.

Union Budget - Proposal and Impact

Budget proposals

Impact on the industry

Exemption of customs duty for new automated shuttle looms

The exemption of new automated shuttle looms from customs duty is expected to boost investments and capacity addition in weaving and garment sectors which may increase competition considering the fragmented nature of the industry.

Union Budget - Proposal and Impact

NoteIn Union Budged 2012-13, the government has announced a financial package of Rs. 3,884 crore for waiver of loans of handloom weavers and their cooperative societies.

Domestic Growth Drivers Increasing retail penetration Textiles and clothing retail comprise of 40% of India’s organized retailing Share of organized retailing to increase from about 5% currently to about

24% by FY 2020

Higher disposable income Consistent increase in per capita income of the masses Consumption of textiles expected to increase to about 11% CAGR

Higher percentage of working women Propensity to spend in working women higher by around 1.3 times

compared to a housewife Population of working women increased to about 32% from 26% in 2001

Increase in nuclear families Avg household size decreased to about 5.0 from 5.36 in 2001 As a result, per household consumption is increasing

Favorable demographic profile Rise in percentage of earning population (15 – 60 years) to about 60%

Domestic Growth Drivers Higher growth in urban population

Urban population growing gradually Favorable demography coupled with rising urban population

and income levels will act as a key growth factor for the Indian textile and apparel Industry

Increased usage of credit cards More spending capacity

Sustainable real GDP growth outlook of around 7% p.a.

Rising disposable income for rural consumers Rising agriculture income & increased employment generation

to drive the demand of basic textile products

Increasing industrial output, rising disposable income, vibrant construction activity etc., to drive demand for home textiles

Export Growth Drivers Textile manufacturing continues to shift to low cost

Asian countries

China’s growth restricted – Increasing cost of labor, scarcity of raw material & power, rising domestic demand

Buyers need to diversify sourcing risk

Availability of raw materials, especially cotton, integrated operations and design skills in India

Favorable demographics, rising income and population levels, and rising retail penetration in other developing countries (other Asian countries, Latin America etc.)

After three months of sharp downturn, registration for yarn exports shot up by 17.8 per cent in May on renewed demand from the traditional markets, including North America and Western Europe

Fresh demand from other markets, such as Latin America , Russia, Japan and Africa.

US non-apparel sector (yarns and fabrics) recorded a staggering 19.5 per cent growth in Jan-April 2012.

Carpets shipments grew at an average rate of over 10 %

Government has revised upwards the textiles export target to $40.5 billion for 2012-13.

Zero per cent duty Export Promotion Capital Goods (EPCG) Scheme for technology upgradation extended till 31 March, 2013

Market-linked focus product scheme was also extended till the end of the current fiscal for exports to the US and the European Union in respect of the apparel sector

Future Trends

Investments Required

Segment Additional Production

Additional Capacities Required Investment Reqd (In Rs. Crores)

Spun Yarn 3.9 Bn. kg New Spindles – 13.6 millionModernized Spindles – 8 million

42,000

Filament yarn

5.8 Bn. Kg Production from modernized capacity – 0.5 Bn. KgProduction from brownfield expansion – 4.2 Bn. KgProduction from greenfield projects – 1.1 Bn.kg

31,000

Weaving 50 Sq. m. New Shuttle-less Looms – 77 thousandSecond hand Shuttle-less Looms – 65 thousandSemi-automatic – 2 LakhsPlain – 2.35 Lakhs

37,000

Knitting 76 Bn. Sq. m.

New Machines – 84 thousandSecond hand Machines – 56 thousand

25,000

Processing 95 Bn. Sq. m.

90,000

Garment and Made-ups

38 Bn. Pcs Machines required – 21 lakhs (for 2 shift working)

65,000

Technical Textiles

30,000 30,000

Total 320,000

Source: Technopak

In order to capture the additional market (US$ 150 Bn) created for Textile and Apparel by 2020, investments to the tune of Rs. 3,20,000 crores (US$ 68 Bn) across the textile supply chain will be required

Slow economic recovery and price competition from

Bangladesh, Pakistan, Vietnam etc.

Though Bangladesh is a competitor in price, it is heavily dependent on India for raw materials (like Cotton).

High raw- material prices, high interest rates, besides demand slowdown in its major markets caused downturn last year

Medical, geo-textile, protective textiles & agricultural textiles are the growing segments

Future Trends

Thank You!

• Textiles Export during 2007-08 to 2011-12 ( Till

Feb.'12) (Item wise)(Eleventh Five Year Plan Period - 2007-2012)

Export data.pdf

Appendix