The textile industry is not easy to operate in. A one-day tour around Mumbai gives a good idea of how many textile mills have bitten the dust over the last few decades.

According to a recent study by Assocham, about 30 per cent of all the textile mills in India were non-operative in the period 2000-2010.

It is, of course, a different matter that many of these mills may be worth more dead than alive — thanks to real estate value — but that doesn’t provide much comfort about intrinsic business prospects.

The early shareholder letter from Warren Buffett after taking over Berkshire Hathaway (which was then a textile mill) is one of the best accounts on the industry that I have ever read.

India possesses competitive advantages for textile manufacturing compared to the West.

The organised textile sector in India employs over 1.4 million people, contributes about 4 per cent to the country’s GDP and 10.1 per cent to total exports earnings, according to Assocham.

Poor show

But China and Bangladesh have honed their edge in the global textile market.

While China almost trebled its global market share to over 30 per cent in the last decade, India’s share crept up only marginally from 3.5 per cent to nearly 6 per cent.

A host of factors have led to a poor showing by the Indian textile industry in terms of growth, productivity and competitiveness. These include high borrowing costs, rigid labour laws, inadequate infrastructure, slow modernisation and sluggish foreign investment.

Within the textile sector, the makers of branded fabrics and apparels, industrial textiles or even textile machinery are better off compared to spinning mills that operate in the yarn segment due to higher value addition.

The yarn manufacturers’ list of woes typically include poor pricing flexibility; high volatility in commodity (e.g. cotton), availability and prices; poor product differentiation; power shortages; increasing labour costs; asset intensive operations; and quality issues.

All these shape the financial condition of companies in the form of low operating margins, high debt levels and low return on capital.

Positive factors

However, lately, the tide seems to be turning for the textile industry (including yarn manufacturers).

Here are a few reasons why.

Cotton prices: After a highly volatile period when cotton prices hit the roof in 2010-11, a relatively stable period in cotton prices over the last two years has helped the sector to recover.

Export demand: There is a pick-up in exports as consumer sentiment improves in Western economies.

Rupee depreciation: This has provided a much-needed boost to Indian textile exporters, especially given the rising wages in China and appreciation of the yuan.

Debt repayment/restructuring: Over the last few years, some of the players in the industry have made a conscious effort to pare down/restructure their debt exposure, making them less risky and more flexible to tap emerging growth opportunities.

Uninterrupted power: The power situation, especially in the southern States, has improved during the last few months. Moreover, many industry players have also augmented their power supply using alternative sources such as windmills.

Companies likely to benefit from this favourable environment include the likes of Himatsingka Seide, Vardhman Textiles, Ambika Cotton and KPR Mill.

What we need to remember though is that despite the current buoyancy experienced by certain segments of the textile sector, our longer term ability to compete effectively in the global market still remains an open question.

This situation could particularly be exacerbated in the immediate future by issues such as interest rate risk.

(The author is a business consultant. Feedback can be sent to perspective@thehindu.co.in .)

Related Topics