Business

Covid-19 Lockdown To Severely Impact Textile Sector Earnings

The virus-triggered global lockdowns, especially in key EU and US markets, are bound to impact growth of the Indian garment and textile industry, at least till first half of the current financial year (FY2020-21), says the recent Edelweiss Research report. Even after the lockdowns are lifted, the report envisages weakened disposable incomes to hamper the sector's growth prospects and hence it has revised down(by 25-37%) the earnings of textile companies in the country. "Covid-19-triggered shutdowns have taken a heavy toll on prime consumption centres of EU and US (accounting for around 70% of the total apparel demand and imports). This is bound to impact Indian companies, at least in first half of this fiscal year, as revenues of major organised players are export driven. We have factored a washout in April, with gradual return to normalcy by September this year," says the Edelweiss Research report. The report adds: "Monitoring debt level of these players is critical as it remains high and is most likely to stretch further as payments get postponed. Looking at the big picture, there's potential for shift in business out of China. However, with immediate survival at stake, the opportunity still seems far away." On the branded apparel segment, the Edelweiss Research believes that in the current shutdown, branded apparel companies with limited fixed costs will be able to navigate the situation, without a huge dent on balance sheet. In the long run as well, in a weakened discretionary consumption/purchasing power scenario, five aspects will be critical in determining brands' ability to bounce back: 1) Brand strength, 2) Affordability, 3) Fashion seasonality, 4) Dependence on multi-brand outlets; and 5) Balance sheet heft. "Empirical evidence during Great Financial Crisis (2008) & demonetisation (2016) also supports our analysis," adds the report. Global scenario points to more pain in store. India's textile industry is one of the largest and most important sectors for the country's economy in terms of output, exports/foreign exchange earnings and employment (around 45 million people, second highest after agriculture). The current COVID-19 pandemic will have a bearing on India's textile sector as well, though it will be second order impact for most organised players, via their export revenues. Initially, the impact was in China and hit yarn exports (China accounted for around 30% of yarn exports in FY2019) and availability of raw material for man-made fibre sector. With the ensuing lockdowns globally and in India,the impact has increased manifold. Even before COVID-19, India's textile exports and companies were grappling with muted growth, with the lockdowns, the situation will worsen, says the report. While the domestic lockdown is hampering production and demand here, revenues of primarily export-focused organised/listed players will hinge on evolution of the global situation. Even for intermediate export items like yarn, a big chunk of demand is deemed exports (around 20% of industry demand). EU and US account for around 70% of global apparel demand and imports. Irrespective of which country intermittent goods (yarn and fabric) are exported to, eventual demand is driven by these two regions. Even in India's case, EU, US and major export-driven economies (which process and export further) constitute around 70% of total exports. US is relatively more vital for major players, especially home textile companies. Meanwhile, the Clothing Manufacturers Association of India (CMAI) which represents the domestic garment manufacturing industry, has said that COVID-19 has plunged the industry into a crisis of unprecedented proportion, threatening the very survival of many of its smaller manufacturers (more than 90% of garment manufacturers in the country are in the MSME sector). In a recent survey conducted by CMAI, it has emerged that at least 20% of its members believe they may consider closing down their business, unless some government assistance is provided. Reacting to the government's advisories that manufacturers' must pay full salaries and wages to all workers during the lockdown period, and that no employee should be out of employment, Rakesh Biyani, president , CMAI says, "The garment Industry somehow managed to pay the March salaries to its employees. However, going forward, in a situation where there is no income for such an extended period, it will be impossible for many of our smaller members to continue paying full salaries and wages, unless we receive some government support."