Lower capital expenditure and working capital intensity to limit moderation in credit profiles
Higher in-home consumption due to increased stay-at-home period and a sharper focus on health and hygiene amid the pandemic are helping Indian home textile exporters weave their way out of the downturn faster than other textiles segments. Revenue de-growth for home textile exporters will be limited to 10-12% this fiscal compared with 30-35% for the overall textile sector, indicates a CRISIL analysis of 50 companies that account for over 60% of India’s home textile exports. Lower revenues would hurt operating margins.
However, lower requirement of capacity addition and working capital will limit material moderation in the credit profiles of home textile exporters this fiscal. The approximately Rs 55,000 crore Indian home textile sector, comprising products such as terry towels, bed sheets and spreads, pillow cases, curtains, and rugs and carpets, derives as much as 60-70% of its revenue from exports. The United States and the European Union account for over 80% of these exports, with big-box retailers of essentials and departmental stores among the major customers.
Says Anuj Sethi, Senior Director, CRISIL Ratings: “Export order flow has improved significantly beginning with the second quarter of current fiscal due to reopening of departmental stores and pent-up demand. With people spending more time at home, including for work, drastically lower socialising opportunities and sharper focus on health and hygiene, demand for home textile products will continue to grow. Demand is expected to stay strong in the third quarter as well due to the festive season when these retailers launch large-scale programmes.”
The improvement is borne out by a 7% on-year sales growth in the fiscal second quarter for four large listed home textile exporters who had logged 40% lower revenue on-year in the first quarter. The lockdown had a limited impact on retailers of essentials as these operated through the pandemic. However, sales at departmental stores suffered heavily in the March-May period. Some retailers also underwent restructuring, leading to permanent store closures. Additionally, manufacturing was impacted due to plant shutdowns for 30-45 days. A weak first quarter will have a bearing on revenues for the full fiscal, which are expected to decline 10-12%.
Also, lower capacity utilisation and benign realisations in the first quarter will lead to suboptimal coverage of fixed costs despite cheaper cotton prices and favourable currency movement. This will lead to moderation in the operating margin of home textile exporters by 200 basis points to 12-13% from about 15% seen over the past two fiscals. With sufficient capacity available, investments in capacity addition are expected to be moderate this fiscal. Also, lower inventory requirements owing to continued soft cotton prices in the coming season will keep working capital requirements stable, and hence debt levels under control.
Says Gautam Shahi, Director, CRISIL Ratings: “While moderation in operating margins will lead to a decline in the interest-coverage ratio for the sample set to about 3.5 times this fiscal from 4.5-5 times over the past two fiscals, the debt to equity ratio will still sustain at adequate levels of 1-1.2 times because of controlled debt utilisation. This will limit material impact on credit profiles.” In the milieu, continued order flow from major export markets, improvement in domestic demand and the ability of players to manage liquidity amid the continuing pandemic will be the key aspects to monitor. That said, home textile manufacturers deriving a larger part of their revenue domestically are affected more than exporters due to extensive lockdowns in India and gradual opening of many retail outlets, leading to slower recovery.