Indian Textile - spinning a success story

By Dr. Uday Lal Pai
Exclusively for InvestorIdeas.com
posted September 18, 2006

India is emerging as a hotspot for sourcing textiles and apparel and has overtaken China as exporter of textiles to the US and European markets.

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The Indian textile sector has woven a fine success story for the second year in a row after the removal of quotas. On January 1, 2005, developed countries removed import quotas on textile products previously sanctioned by 1974 Multifibre Arrangement (MFA) of 1974. This change provides a major opportunity for India to expand production and exports of textiles and apparel to developed country markets.

India has overtaken China as exporter of textiles to the US and European markets due to the cap on Chinese textiles in those countries. China's export in the last quarter of this financial year was 9%, while that of India's stood at 13% after the quota regime was abolished in January 2005 under the WTO agreement. "The 10% cap on Chinese textiles exports will continue till 2008. This has provided ample opportunity to India to establish itself in the export market and compete with China when cap on its textile exports will be lifted," says the Textiles Minister Shankersinh Vaghela.

The industry is one of the largest and most important sectors in the economy in terms of output, foreign exchange earnings and employment in India. It contributes 20 percent of industrial production, 9 percent of excise collections, 18 percent of employment in the industrial sector, nearly 20 percent to the country's total export earnings and 4 percent to the GDP.

With post-quota numbers coming through, the textile industry has had a great year. The overall textile output has grown nearly 20% to stand at US$ 40 billion. Textile exports, which were growing at close to 10% before quotas were removed in '05, have grown nearly 20% to clock revenues of $13bn for the calendar year.

Nayan Parikh, chairman, Textiles Committee, says, "From now until 2010, we're targeting an annual growth of 25% in export revenues for the textile sector. The aim is to reach a targeted $40bn in export revenues alone." With quota restrictions on China in force until '08, Indian textile manufacturers stand to gain the most.

Export thrust everywhere

Garment exports from India have increased by 27 percent, registering US$ 7 billion in 2005-06, as against US$ 5.5 billion in 2004-05. After phasing out of quota system in 2005, the exports to the US have gone up by 34% and European countries by 30%, A Shaktivel, president, Tirupur Exporters' Association said.

The exports to the US in February have narrowed the gap between its nearest competitor, the second-placed Mexico. Indian exports to the US clocked $922 million, within breathing distance of Mexico's $ 963 million. While Indian exports grew by 25 percent in value terms, the North American country's exports saw a fall of 12 percent. "If the Indian exports maintain the momentum, as they are expected to, we are sure to become the second largest exporter to the US in value terms when the March statistics come out," said an industry analyst.

Traditionally, the US market has been the key driver for Indian export growth since global textile trade was opened up in January last year. But the European Union market is beginning to overshadow the US as the biggest growth driver for Indian textile exports. Textile exports have started to make greater inroads into the EU market, especially in the value-added segments such as garments, with Spain, the UK, Germany, France and the Netherlands emerging as the fastest growing markets during the major part of last fiscal, according to the latest Government data. According to industry players, India is expected to consolidate its position in the EU as the European countries intensify their clampdown on China this year.

India will emerge as the world's third largest cotton exporting country in 2006-07, with an impressive 52 percent export growth in comparison to 2005-06 say market observers. The jump will be driven by a projected 1 million-bale increase in production, combined with a large beginning stock. Since 2000/01, India has increased production by more than 9 million bales and increased exports from 94 thousand bales to the projected 3.8 million.

India has also emerged the biggest exporter of handmade carpets in the world beating traditional powerhouse Iran and China. The country has grabbed 35.5 percent of the US$ 2.6 billion export market, according to the latest data available with the Carpet Export Promotion Council (CEPC)."While we are happy with the performance of the Indian carpet industry to emerge as the main supplier to the world market, the plan is to further consolidate our position and double production in the next five years," said Sanjay Agarwal, Development Commissioner (Handicrafts). Apart from cost advantage in production, flexibility has been the key agent in scoring over the global competition.

According to a World Bank analysis, India is the third largest cotton producer with 17 percent of worldwide cotton output. However, it is not clear if India's cotton production would keep pace with the quantity and quality needs of an expanding textiles and apparel industry, despite being a major cotton producer with significant potential to expand its output.

The government initiatives

India government has established a sub-committee within the group of ministers to eliminate hurdles and make labor laws more flexible. "The group comprises the commerce minister, textile minister, labor minister, chief ministers of states and trade unions. It would look at the proposal of increasing the hours in a shift from nine to 12 hours and explore the option of increasing the working hours in a week to 60 hours from 48 hours," says a government official.

The textile sector appears to be joining the SEZ bandwagon, with 8 zones planned with an outlay of US$ 1.8 billion. While four of the 26 parks being constructed under the scheme for integrated textile parks (SITP) will be upgraded to full special economic zones (SEZ) status, handicrafts will also get a fillip with four SEZs.

"If the potential of these export-oriented parks for earning foreign exchange is high, they are converted to special economic zones," said RCM Reddy, CEO (cluster development initiative), Infrastructure Leasing & Financial Services (ILF&S) - project management consultant (PMC) for implementing the scheme.

Vaghela said the scheme for Integrated Textile Parks had proposed to build 25 integrated textile parks in 18 months that would facilitate investments of $4.1 billion and create half a million jobs. "So far, nine such parks have been sanctioned by the textile ministry and since there is a huge demand, the number of parks sanctioned can be increased," he said.

However, the sources at the Ministry of Textiles said that it has received 52 project proposals for setting up textile parks under the scheme of integrated textile parks. But it is likely to shortlist this number so that the final sanction would be restricted to 25 projects this year. According to Sudripta Roy, Joint Secretary in the Ministry, nine projects were given sanction and seven are under consideration. Sanction for another nine would come through soon.

Advantage India

India has been experiencing strong performance in the textile industry, across different segments of the value chain, from raw materials to garments. Domestic production has been growing, as well as exports.

India has several advantages in the textile sector, including abundant availability of raw material and labor. It is the second largest player in the world cotton trade. It has the largest cotton acreage, of about nine million hectares and is the third largest producer of cotton fiber in the world. It ranks fourth in terms of staple fiber production and fourth in polyester yarn production. The textile industry is also labor intensive, thus India has an advantage.

A recent study estimated India's labor costs (total employment cost for labor across industries) to be amongst the lowest in the world, a sixth of even China's. The opportunities for Indian manufacturers are huge in ready-made garments. For instance, T-shirts made in India for $5 or less, are sold in American stores for $75 and more. India's ready-made garments sector was stripped off its small-scale industry status less than three years ago. As a result, textile firms were able to undertake massive capacity expansion drives over the past couple of years

The industry is also undergoing transformation, determined by a few key trends. While the structure is predominantly of small scale, unorganized player; de-reservation and the removal of quotas has led to the growth of vertically integrated, large-scale units as well. India thus has the potential to be a significant player not only in complex, customized designs, but also in low cost mass production. Mass customization may well be a key differentiator for the industry in future.

India has a natural competitive advantage in terms of a strong and large multi-fiber base, abundant cheap skilled labor and presence across the entire value chain of the industry ranging from spinning, weaving, and made-ups to manufacturers of garments. India's textile industry comprises mostly small-scale, non-integrated spinning, weaving, finishing and apparel-making enterprises.

Seeking more investments

The sector attracted an investment of about US$ 3.2 billion in 2004-05 and during 2005-06, the investment increased to about US$ 6.4 billion.

Indian textile industry is expected to attract an investment of US$ 1.3 billion in 2006-07. The maximum investment inflows would be in the spinning sector amounting to US$ 490 million followed by the processing segment (US$ 352 million).

According to a survey conducted by the Confederation of Indian Textile Industry (Citi), after the abolition of quota regime last year, majority of composite mills had initiated expansion, modernization and capacity building plans. These companies would make major investment in spinning, home textiles, processing and garmenting. "Of the $490 million to be invested in the spinning sector, 65% will go into capacity building; 25% and 4% will be for modernization and forward integration, respectively," the survey predicted. The survey was conducted on 50 composite mills during the 2004-07 period.

"The textile sector needs an investment of $31 billion between 2005 and 2010 and we are confident that this target will be achieved," Vaghela said.

The big players in the industry have lined up investments of over US$ 1 billion to take advantage of the opportunity global market offers. Indian companies were going very slow before 2005, as they were apprehensive of post quota scenario. Thus not much investment was committed in preparedness to MFA regime. Only when they realized the potential they started thinking on those lines, industry analysts said. Buoyed by growing opportunity, the industry has pledged over $1 billion investment for either capacity expansion or diversification, they said.

However, if estimates are anything to go by, Indian companies need to invest about $ 7 billion in improving technology in the next 2-3 years to become more competitive.

Foreign investment and market presence was not very high in India's textile and apparel sector. With liberalization in investment and the subsequent the removal of quantitative restrictions on several textile products, the Indian market now has the presence of several international brands. However, the presence is more in the nature of brand licensing with Indian players rather than direct investment. U.S. brands have a larger presence in the market than others.

Poised for growth

India's textile is poised for higher growth. According to a study by CRISIL, the Indian textile and apparel industry can achieve a potential size of US$ 85 billion by 2010, with a domestic market size of US$ 45 billion and nearly 60 percent of exports comprising garments.

Sanju Shishodia, Head CRISIL Research, said the sector has the potential to reach $85 billion by 2010 from its current size of $36 billion. Its average annual growth rate is 11 percent. This growth can be further fuelled by both exports and a rise in domestic consumption, he said. Emphasizing why the textile sector requires foreign direct investment (FDI), Shishodia said, "Indian textile companies are small and fragmented. The financial strength of individual companies is too weak. FDI will help by building large scale capacities and will help capture a bigger share of the market."

India has the capability of becoming one of the leading exporters of textiles, as it is the third largest cotton producer in the world after China and the US, said Asha Swarup, Additional Secretary and Financial Adviser, Ministry of Textiles.

With textile exports set to grow 25 percent in 2006-07, India is emerging as a hotspot for sourcing textiles and apparel in the post-quota period. Increased number of buyers is visiting India for direct sourcing, while more vendors are going abroad for direct selling. "Indian textile exports are doing well, though still behind China. We hope to keep growing at 25% this fiscal," a textile ministry official said.

According to a study made by a team of KPMG professionals specializing in cross-border acquisitions and mergers, the Indian textile industry will soon be witnessing a number of cross-border acquisitions by Indian businessmen, KPMG, said that quite a number of textile machine manufacturers abroad are ready to sell their companies and their first preference is Indian manufacturers. They said a number of Indian businessmen are already talking to companies abroad. The prospective acquisitions are a result of the boom in the textile sector boosted by the international demand for Indian products. KPMG said that because India has witnessed a great growth in the textile industry, especially after the removal of the quota system, the entire world is looking at India for textile products.

Of the 116 companies, which have declared their annual results in 2006, a many have posted handsome profits. Good FY06 results, institutional buying interest and a stable outlook on cotton prices are spinning the growth story of textile stocks. Market analysts say: "The upswing in textile stocks is partly on the back of institutional buying interest from the recently launched mutual fund schemes like Fidelity Special Situations Fund and Franklin India Equity Income Fund. Moreover, the FY06 results declared by some textile majors were good."

Major Players

1. Arvind Mills Ltd.
2. Raymond Ltd.
3. Alok Industries
4. Vardhman Spinning & General Mills Ltd.
5. Indian Rayon
6. Century Textiles
7. Welspun India
8. Himatsingka Seide Ltd.
9. Bombay Dyeing

Disclaimer
Dr. Uday Lal Pai is an independent columnist for this web site. Dr. Uday Lal Pai  may hold long or short positions in any of the stocks mentioned in this article and those positions can change at any moment. InvestorIdeas.com Disclaimer: www.InvestorIdeas.com/About/Disclaimer.asp, InvestorIdeas is not affiliated or compensated by the companies mentioned in this article. Dr. Uday Lal Pai  is a freelance writer. Nothing in the articles should be construed as an offer or solicitation or recommendation to buy or sell any specific products or securities. Past performance does not guarantee future results.

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