U.S.-U.K. Exports Still A Concern For Indian Textile Companies
Wait and watch, say export-oriented textile companies and analysts.
Indian textile makers' exports are slowing down as demand slows with the global economy grappling with inflation.
Ready-made garment exports fell to a 28-month low of $988.7 million in October. The manufacture of textiles and wearing apparel as a part of Index of Industrial Production declined 12% and 21.1% year-on-year in September, respectively. Shares of textile companies are down 15-50% year-to-date.
Order flows of textile companies have slowed or have even been deferred as demand destruction has caused an inventory pile-up in end markets. Europe has been battling a massive energy crisis, hurting its industrial activity since Russia invaded Ukraine in February. The purchasing power in key export markets like the U.S. has reduced due to high inflation and fears of a looming inflation. The American market accounts for nearly 50% of textile exports and 28% of apparel exports from India.
Managements of textile companies signal caution, citing slowing demand in the U.S. and Europe.
The macro-economy, inflation and recession in the U.S., Europe and the U.K., where it will be a long winter due to the energy crisis, is going to be a tough one, according to the company's management. Welspun is trying to correct the inventory pile-up in the U.S. by the end of the financial year, the management told BQ Prime. Holiday season for retailers like Amazon Prime Day was very weak. In fact, retailers' forecasts for the holiday season have also been subdued.
Still, the U.S. is a very resilient economy, and "we will see the country swing back in the coming quarters", the management said, mostly by April-June quarter 2023.
The international business of the company is still a little soft owing to demand concern, the company reiterated to analysts in a concall. Welspun is experiencing headwinds in the export business for flooring and home textiles.
Export markets like the U.S., Europe, and Japan continue to grapple with inflation and supply-chain issues amid a continuous depreciation of the euro, the management said in its second-quarter earnings concall. The business-to-business customers are likely to defer certain orders as they are witnessing a slowdown in the secondary market, it said.
The largest producer of cotton is also witnessing a slowdown in overseas shipments. Exports as a percentage of revenues eased to 51% in first-quarter of FY23 from 57% a quarter ago and 73% from a year earlier. The highest it achieved was 67% in FY21. Thereafter, it slipped to 65% in FY22 with FY23 seen as challenging. The company's stock has fallen 20% in the last six months.
Indo Count Industries
The demand is still subdued and they are on a wait-and-watch mode to get an update from retailers in the U.S. to understand how the holiday season pans out, the management said. Geopolitical concerns or high inflationary environment, and increase in input costs are further impacting the overall sluggish demand offtake, the company said. Indo Count expects inventory levels to normalise after the holiday season.
Sutlej Textiles and Industries
The company is witnessing muted export demand with the current global economic challenges further compounding the situation, the management said. The domestic market is absorbing some of the capacities of exports. But if this goes on then the domestic market will also come under pressure in the near term, they said.
"The slowdown in the textile sector is eminent and exhibited in the quarterly numbers. Whether the slowdown is fully priced in or not is the key," said Mayuresh Joshi, head of research at William O'Neil India.
This would continue to be a drag on earnings for some time, he said. "EPS and price trend are lagging, hence the advice to wait and watch till Q3 FY23 numbers are out," he said, preferring companies that are vertically integrated. "Keep on the buy list" companies such as KPR Mill Ltd. and Gokaldas Exports Ltd. that "anticipate better opportunities in the sector in the coming quarters".
Abhishek Jain, head of research at Arihant Capital, said the market has already discounted a 70% fall in the prices of textile companies. However, he warned that things could get worse from here.
"Despite all the negatives we are seeing in the U.S. and Europe, we are also seeing some strength in the markets. If we see a U-shaped recovery, textile companies will come back into action."
"Remain selective in the textile sector; domestic-oriented textile companies will command a higher valuation than export-oriented textile companies," he said, adding that he was "positive on Welspun India, Raymond, and Siyaram Silk Mills Ltd., where the balance sheet is strengthening."
The government has set a target for textile exports of $100 billion in the next five to six years and plans to scale up the total value of domestic and international trade to almost $250 billion to $300 billion.
Domestic cotton prices have fallen from a high of Rs 1.1 lakh per candy. Yet, they are still higher than foreign cotton prices, putting pressure on profitability and margins. Capacity utilisation has become a major concern for textile companies due to lower exports.
The wedding season has come to the rescue, and the companies have shifted their strategy to concentrate on domestic sales.
Some of the factors going in favour of the industry are shifting of manufacturing from China to India, a stronger dollar, lower cotton import duties and production-linked scheme.