By: Rajesh Naidu

In the past two years, the perception of investors as well as industry experts relating to the Indian textile industry has undergone a considerable change. The Technology Upgradation Fund Scheme (TUFS), launched in 2005, has helped most textile companies improve their financial performance. The capital expenditure cycle that started then is coming to an end, the benefits of which could actually start accruing now onwards. In that sense, the industry appears to be close to an inflexion point.

However, all is not well. Competition in the domestic market has grown multi-fold, the industry is still vulnerable to raw material price shocks, macroeconomic headwinds still persist, and the government's policy decisions on exports continue to hamper growth. The ET Intelligence Group lists the hurdles the domestic textile players need to overcome to achieve sustainable growth.

Growth Numbers

In the past five financial years ending FY11, net sales of the top 10 textile companies in terms of revenues have grown at a compounded annual growth rate (CAGR) of 23%, while for four years ending 2005 (pre-TUFS period), the sales rose at a CAGR of 17%. Similarly, the growth in operating profits improved to 22.5% post-TUFS as against 17.8% earlier. Very low levels of net profit or losses in years FY2000, FY01, and FY02 make such a comparison impossible. This is a testimony to the fact that in the past five years, the operating environment for business in the textile industry has improved better, thanks to TUFS.

Most local textile players are on the verge of completing their capital expenditure cycle, which kicked in after the introduction of the TUFS scheme in 2005. In the past six years, companies, such as Alok Industries, Trident, Garden Silk Mills and Arvind among others, have availed the benefit of TUFS scheme and are poised to benefit from their expansion. The industry is estimated to have invested nearly ` 2 lakh crore in upgrading and expanding capacities till date under TUFS.

The Hurdles Ahead


One of the impediments textile players have been facing for years is the domestic availability of cotton. In spite of being a cotton-surplus country, India's cotton export policy allows a chunk of its production to be exported without leaving enough for the domestic consumption.


During the second half of calendar year 2010, the stock-to-use ratio of cotton the stock of cotton that is left for domestic consumption after exports, was just 15% against the world average of 40%. This led to a shortage of cotton shortage and the prices doubled in the country. This has brought about a situation where the country exports raw material and imports finished products.


Similarly, the government's restriction on cotton yarn exports to 725 million kilograms for FY11 has resulted in piling up of inventories. As the quota limit was reached much earlier, there were no exports of yarn for two and half months of FY11, which created an inventory pile up of more than 500 million kgs.


Besides this, another major obstacle that the industry faces is its dependence on a natural commodity such as cotton, which exposes them to volatile price fluctuations. This is why many textile players are moving to man-made products such as polyester to lower their dependence on natural cotton.


What the Industry Needs


In order to ensure sustainable growth, the industry needs to consolidate. It is only through consolidation, that the industry will be able to achieve a consistent growth. Going by estimates, the share of the organised sector in the textile industry is 20% with the rest - 80% being accounted for by the unorganised sector.


Consolidation would help create a number of large fully integrated players, who will be better equipped to face external challenges. Besides this, the industry needs a favourable cotton policy, which will promote domestic consumption first before allowing exports.


This can go a long way towards reducing the input costs of textile companies. Addressing these issues would help boost the financial performance of textile companies.


Originally published in The Economic Times dated May 23, 2011 by Rajesh Naidu.