Textile & clothing units profitability likely to improve as demand picks up

Written by Sajan C Kumar | Chennai | Updated: Mar 6 2010, 05:26am hrs
Sales and profitability in the textile sector are likely to improve from the 2008 lows as units highlight a recent pick-up in domestic and international demand. While Indias apparel exports have also been affected by the removal of US quotas on Chinese products and domestic exporters lowered prices in 2009, India is still in direct competition with China. Though domestic retail has buoyed prospects of the sector, overall domestic demand has showed signs of slowdown attributable to a slump in consumer spending, said a latest Confederation of Indian Industry (CII) quarterly update on textiles.

The update pointed out that the policy initiatives by the government are expected to give a boost to integrated players in the organised sector, who would then be able to modernise and improve the quality of the weaving sector. The economic slowdown resulted in a significant dip in imports of textiles and clothings by the US and the EU.

During Q2FY2010, although higher volumes resulted in a 12.3% (y-o-y) increase in operating income (OI), lower increase in input and other operating costs resulted in an 89% (y-o-y) increase in operating profits of a sample of listed Indian companies in the textile industry. The OI (y-o-y) growth declined from 10% in Q2FY2009 to -3% in Q4FY2009, followed by an increase of 6% (y-o-y) in Q1FY2010.

While operating margins have increased in Q2FY2010, interest costs (as percent of OI) continued to increase sharply from 5% in FY2008 to 7% for the most part of FY2009. However, they have shown a decline from 7.4% in Q3FY2009 to 5.7% in Q2FY2010. Depreciation costs have also increased at a high rate because of the substantial capex incurred in earlier years.

However, net losses have declined significantly in Q2FY2010. Further, the listed companies reported a nominal pre-tax profit in Q2FY2010, following pre-tax losses reported in six successive quarters till Q1FY2010. Although raw material costs have increased at a higher rate than OI during Q1FY2010 and Q2FY2010, other costs have declined in Q1FY2010 and Q2FY2010 attributable largely to a decline in selling and administrative costs. However, employee costs have remained stagnant attributable to stickiness of employee costs in the short term. Thus, the higher increase in raw material costs has been accompanied by a decline in other costs resulting in overall operating costs increasing 9.2% (y-o-y) in Q2FY2010. In fact, the (y-o-y) rate of increase in operating costs has been lower than the (y-o-y) rate of increase in OI during Q1FY2010 and Q2FY2010.

During Q2FY2010, listed companies with registered offices in the southern region reported a 15% (yoy) increase in operating income (OI) to Rs 20.72 billion. The OI (y-o-y) growth was modest at 7.5% in H1FY2009, but OI declined in Q3FY2009 and Q4FY2009, as the early signs of recession became evident. The growth in OI during Q1FY2009 transformed into a sharp decline in OI (y-o-y) in the subsequent three quarters of FY2009.

However, OI increased at a slow rate of 3% (y-o-y) in Q1FY2010, followed by substantially higher growth of 15% (y-o-y) in Q2FY2010. On a q-o-q basis however, OI growth has been positive for the past four quarters, as there was some signs of restocking following the sharp decline in sales during late-2008. OI on a (q-o-q) basis increased 3% in Q1FY2010. On a y-o-y basis, OI decline seems to have flattened out in Q4FY2009, following a sharp reversal in Q3FY2009.