Stable outlook on ratings of textile cos.

THE BUDGET 2001-02 has a number of positive announcements for the textiles sector and this, in the Credit Rating Information Services of India's (Crisil) opinion would provide stability to the ratings outstanding in the sector. Crisil's rating portfolio in the textile industry comprises 33 companies covering cotton and synthetic segments in spinning, weaving, knitting, garments and textile machinery.

The budget is in line with the Government's thrust towards strengthening the textiles sector to face the frontierless free trade regime w.e.f. January 1, 2005. Budgetary allocations have been increased by Rs. 193 crores for the Ministry of Textiles and by Rs. 150 crores for the Technology Upgradation Fund Scheme (TUF). The announcements including allowance of accelerated depreciation of 50 per cent for assets under TUF for weaving & garmenting, reduction of import duty from 15 per cent to 5 per cent for textile machinery, removal of capacity based excise duty for textile processing units and rationalisation of duties on inputs of polyester fibres would speed up the modernisation process and increase competitiveness of the industry.

Modernisation

Modernisation in textiles industry is concentrated on spinning while weaving has lagged behind with the installation of only 20,000 shuttleless looms out of the total capacity of 18 lakh looms. This compares poorly with countries like China, Thailand and Indonesia who have modernised significantly in weaving. The budget proposal to install 50,000 shuttleless looms and modernise 2.5 lakh looms by the year 2004 would give the much needed fillip to the weaving sector. This would involve a total outlay of nearly Rs. 25000 crores over the next three years. Given the current financial state of the industry and the quantum of investments, the actual implementation of the proposal would, in Crisil's view, be a major challenge.

The benefit of 50 per cent accelerated depreciation would fuel the modernisation/addition of value added capacities in the medium term. While the 10 per cent reduction in import duty on textile machinery will largely benefit the industry, the impact will be marginal on exporters who are already importing at 5% concessional duty under the EPCG scheme. With virtually all shuttleless looms being imported, the reduction in duty would result in substantial savings for the industry.

Synthetic segment

Lowering the import duty on polyester yarn in the last budget, while retaining the same on inputs resulted in squeezing of the margins of polyester yarn manufacturers. The reduction in import duties of the inputs - PTA, DMT, MEG and Caprolactum from 25 per cent to 20 per cent would bring these on par with the present duties levied on polyester and nylon based yarn thereby removing the anomaly. This would lead to a reduction in raw material cost by up to 5 per cent for synthetic yarn manufacturers like Century Enka, Indo Rama and Sanghi Polyesters.

Cotton segment

Cotton yarn including sewing threads have been spared from a hike in Cenvat from the present level of 8 per cent to 16 per cent which would retain the cost competitiveness of yarn manufacturers. Withdrawal of excise duty benefit up to Rs.1 crore for SSI units in the spinning sector would benefit the organised players as duty evasion would no longer be a cause of concern.

Fabric processing

Levy of excise duty on ad valorem basis for independent textile processors would bring all textile processing units at the same level of 16 per cent Cenvat. The impact of this would be mixed across the industry with composite mills being better placed to compete in the market and independent processors facing higher excise incidence.

Readymade garments

With the recent dereservation of garmenting from SSIs, the sector is poised for a healthy growth with lot of Foreign Direct Investments expected to flow in. The proposal to set up Integrated Apparel Parks with an initial investment of Rs. 10 crores would be a booster in this direction. Imposition of a 16 per cent excise duty on branded garments is a logical step since the sector has been dereserved from SSI and is also in the form of a pre-emptive measure for imposition of a counter-veiling duty on garment imports at a later date, if required. This would result in additional cash outflow for the branded garment segment.

Labour laws

The budget has also mooted an amendment of the Industrial Disputes Act for increasing the ceiling on the number of workers from 100 to 1,000 for obtaining prior approval from the Government in respect of labour retrenchment, layoff and closure. This, if materialises would have a positive impact on the industry especially in segments like RMG which are labour intensive and seasonal in nature. The budget proposal of widening the scope of contract labour to include core and non-core activities would also bring in certain flexibility in recruitments.

While the budget has met with most of the industry expectations, the areas that have been left untouched are reduction in the import duty of cotton and a reduction in the excise duty of polyester yarn.

The positive measures announced in the budget coupled with removal of surcharge on corporate tax, reduction of dividend tax from 20% to 10% would lead to improvement in the bottomline. However, the profitability of textile companies would continue to be exposed to the inherent industry factors viz. - cyclical nature of cotton yarn, volatility in price movements in synthetic yarn, high and fluctuating raw material cost and marginal overcapacity.

Further, the predominantly debt funded growth/ modernisation initiatives by textile companies has resulted in increase in leveraging in the last two years. This coupled with fluctuating operating margins and higher capital charges would continue to impact the financial risk profile of rated companies in the textiles portfolio. Overall, the rating outlook for the textiles sector would continue to be stable.

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