India Ratings and Research (Ind-Ra) has maintained a stable outlook for the country’s textile sector for 2019-20. Strong domestic demand, along with the waning impact of the disruptions due to the goods and services tax (GST) and demonetisation and the rising export of textiles aided by a weak Indian rupee, is likely to lead to volume growth and make firms profitable. Ind-Ra expects textile industry players to register improved cash flow from operations for fiscal 2019-20, as their working capital would stabilise as challenges related to demonetisation and GST subside, according to a report.
The liquidity of the majority of players in the sector is likely to remain adequate, along with a considerable improvement in operational cash generation, backed by steady raw material costs and strong demand from end user segments. Ind-Ra expects the domestic and global stock-to-use ratios to remain under pressure during cotton year 2018-19. The agency expects global cotton production to decline in cotton year 2018-19 owing to a low acreage and adverse weather conditions in key cotton-growing nations.
Domestic cotton price moderated to an average rate of Rs. 128/kg during the third quarter of 2018-19 from the average level of Rs. 134/kg during the second quarter. While expectations of a high acreage during cotton year 2019-20 narrowing global production gap could keep cotton prices range-bound, an upward risk to cotton prices prevail, Ind-Ra said.
China’s cotton production continues to be significantly lower than its consumption. Its cotton deficit was increasingly met through imports, apart from a drawdown of its reserves, over the last three years. With its cotton reserves dwindling, the sensitivity of international cotton prices to China’s cotton policies have increased in the past few quarters.
China increased the cotton import quota by 0.8 mn tonnes, amid concerns of declining inventory levels after the imposition of a 25.0 per cent import duty on US cotton. Any decision by China to further increase imports could lead to a rise in global cotton prices, the agency said. Domestic textile exporters are likely to continue to benefit from improved cost competitiveness due to a weak Indian rupee, which would drive volume growth.
India’s apparel exports showed signs of recovery in the third quarter of 2018-19 and are likely to rise in the next fiscal after remaining weak for three years. However, the continuance of export incentives remains critical as they meaningfully contribute to the operating profits of textile exporters, particularly those in the downstream segment of apparels and home textiles, Ind-Ra added.