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.
Operating profitability will improve 150-200 basis points to 14.0-14.5%, due to lower raw material cost and better operating leverage, but will still hover below 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 accrual - driven by improved revenue growth and profitability - keeping leverage in check.
A CRISIL Ratings analysis of 40 companies, accounting for 40-45% of the sector's revenue, shows as much.
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 candy1 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.
Says Mohit Makhija, Senior Director, CRISIL Ratings, "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 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 exported2 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 only 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, gearing3 is seen improving to 0.70-0.75 time as on March 31, 2024, as against 0.8 time a year earlier. Interest coverage4 will improve to 4.8-5.0 times this fiscal versus ~4 times last fiscal 2023."