The outlook for Indian cotton textiles remains negative to stable for H212, says rating agency Fitch adding, however, that it had revised its outlook for synthetic textiles to negative from stable as the industry grapples with weak demand and volatile input costs.
In its half-year sector report, 2012 Midyear Outlook: Indian Textiles, Fitch expects a prolonged demand slowdown to subdue capacity utilisation levels and revenue growth prospects of the domestic textile companies. Softening cotton and cotton yarn prices have helped margins recover to some extent, but have not translated into a full-scale demand revival. Benefits from rupee depreciation on exports will be limited by the existing hedge positions of, or by price renegotiations and discount demands from, overseas buyers.
Cost increases in crude oil-based raw materials due to a weak rupee, along with lower cotton prices and sluggish demand, have reduced the substitution demand for synthetic fibres and textiles. Also, an oversupply of domestic partially oriented yarn should lead to pressure on the selling prices and therefore margins of synthetic textile companies.
The sub-investment-grade ratings of 80-per cent of Fitch-rated Indian textile companies have already factored in some of the risks along with weak credit quality as indicated by the near-full utilisation of working-capital limits and negative operating cash flows; this cushion contributes to the high level (87 per cent, 60 ratings) of 'stable outlooks'. During February-July 2012, 12 textile ratings were affirmed, two were upgraded, two downgraded, and one placed on Rating Watch Negative.
The proportion of Negative rating Outlooks in Fitch's portfolio is 13 per cent, in view of margin risks due to volatile input costs and a likely worsening of financial leverage due to ongoing capex plans.
Cotton prices are again on a rising trend, reversing the moderate (5 per cent-10 per cent) decline in prices seen during January 2012 to May 2012. Fitch expects cotton prices to increase further in the September 2012-March 2013 cotton season, led by a fall in acreage and delayed monsoons, which in turn will put pressure on the margins of textile companies. Prices of power and fuel are edging higher and interest costs continue to be high, although exporters enjoy a breather of 2-per cent interest subsidy.