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Strong rupee hits textile exporters hard
Exporters have been facing subdued demand trends in the key importing countries as well as intense competitive pressures from nations such as Bangladesh and Vietnam over the past few years.
Strong rupee hits textile exporters hard

Indian textile exporters are facing difficult times since the past few months which have led to constrained growth as well as pressures on profitability, which has been aggravated by a strong rupee. Exporters have been facing subdued demand trends in the key importing countries as well as intense competitive pressures from nations such as Bangladesh and Vietnam over the past few years. In addition, unfavourable currency movements and high raw material prices in the past six to nine months as well as recent revision in duty drawback rates have only added to their woes. With exports accounting for more than one-third of the Indian textile market, this is a matter of concern, notwithstanding a large domestic market, says a new report from ratings firm ICRA.

The slowdown in apparels segment has mainly been on account of subdued demand conditions in key textile-consuming regions of United States of America (US) and European Union (EU) which account for a majority of exports from India. This apart, cotton-yarn exports have been under pressure on account of a decline in demand from China, which used to account for more than 40 per cent of total cotton yarn exports from India till last year and accounted for only around 17  per cent of India's cotton yarn exports in the first four months of FY2018. India appears to be the worst-affected nation amongst cotton-yarn suppliers to China, as is evident in a decline in India's share in China's cotton yarn imports to 8 per cent in Q1 FY2018 vis-a-vis 20 per cent and 25 per cent in Q1 FY2017 and Q1 FY2016, respectively.

The pressures on textile exporters have become more severe with strengthening of Indian Rupee against currencies of key competing nations during the current calendar year, which reduced competitiveness of Indian exporters vis-a-vis their counterparts.

Jayanta Roy, Senior Vice-President and Group Head, Corporate Sector Ratings, ICRA says, "Notwithstanding the 2 per cent depreciation in the Indian Rupee vis-a-vis the dollar in the month of September 2017, the Indian Rupee sustained its strong performance against currencies of most of the countries competing in the global textile space during much of the current calendar year."

While the Indian currency has strengthened by around 5 per cent against the dollar in the eight months of calendar year 2017, currencies of other key nations competing in the textile space such as Vietnamese Dong, Bangladeshi Taka as well as Pakistani Rupee depreciated by around 0.5-2 per  cent against the dollar during the same period.

Further, higher input prices (primarily cotton) this year vis-a-vis last year put pressure on the profitability pressures for exporters during H1 FY2018, given the dominance of cotton in textile exports from India. While cotton prices have corrected to an extent from mid-September 2017 onwards which is expected to provide respite during H2 FY2018, recent revision in duty drawback rates is likely to exert some pressure on margins. The Government of India has recently notified revised duty drawback rates under the GST regime which are applicable to exporters with effect from October 2017 onwards.  There is a downward revision in duty drawback rates for most product categories in the textile sector under the GST regime, when compared with duty drawback rates for exporters claiming Cenvat under the earlier tax regime.

"Considering that GST rates for most product categories in textiles are in line with effective tax rates under the earlier tax regime and the extent of benefit from improved input credit chain post GST implementation remains to be seen. The overall impact of GST and the revised duty drawback rates on the sector is uncertain at present." Adds  Roy.

Notwithstanding the pressures being witnessed on profitability, debt levels across the sector are expected to decline with the industry focusing on sweating the existing assets and thereby undertaking limited debt-funded capacity additions. Further, with cotton prices easing out from mid-September 2017 onwards, profitability pressures are likely to subside from Q3 FY2018 onwards. As a result, ICRA expects the financial and credit risk profiles of most textile exporters to remain stable.

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