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Macro Economics

Prabodh Upadhyay Pralhad Joshi Praveen P Pushkar Choudhary

Caselet
The recent rupee depreciation has enabled the Indian textile industry to hold yarn prices and also increase yarn exports Though Indian industry demonstrates stronger backward linkages, low labour costs have enabled countries like Bangladesh, Pakistan and Vietnam to overtake India in terms of capturing textile export markets With Chinese Yuan appreciating, Indian exports have become more competitive. Indian textile export share is marginal (5% as compared to Chinas 30%) As a CEO of leading textile manufacturer, you are planning to go in for capacity expansion. Capacity expansion necessitates funding and thus you approach a consortium of banks. Prepare the detailed projections convincing the bankers how the global economic trends portray well for Indian textile exporters.

Overview
The Indian textile industry is one of the major sectors of Indian economy and contributes almost 14 per cent of Indias industrial production, 4 per cent of National GDP and almost 17 per cent of India's export earnings

As per the annual report 2010-11 of Ministry of Textiles, the size of Indian textile sector is reached up to USD 55 billion India has the potential to increase its textile and apparel share in the world trade from the current level of 4.5 per cent to 8 per cent and reach US$ 80 billion by 2020 Exports of textile grew to USD 26.8 billion in FY 2010 from USD 17.6 billion in FY 2006. Indias textile trade is dominated by exports with a CAGR of 6.3 per cent during the same period

Advantage India
According to the Confederation of Indian Textile industry, the continuous rupee depreciation has been profitable for many textile and apparel exporters in the country

Textile buyers from the US and EU are tempted to shift orders from China, Bangladesh and Vietnam to India thanks to the increased competitiveness of Indian exporters thanks to a weaker local currency Robust demand Increased penetration of organised retail, favourable demographics and rising income level to drive textile demand Growth in building and construction will continue to drive demand for non-clothing textiles Competitive Advantage Abundant availability of raw materials such as cotton, wool, silk and jute and skilled workforce has made India a sourcing hub

Advantage India
Increasing investments
Over USD35 billion of investments have been made in the textile & clothing sector during the last four years, with the cotton textile segment accounting for around 75 per cent Policy support 100 per cent FDI through the automatic route is allowed in the Indian textile sector SITP was approved in July 2005 to facilitate setting up of textiles parks with world class infrastructure facilities Market Value: USD220 billion

Notable trends in the Indian textile sector


Increasing investment in TUFS & TMC
The Ministry of Textiles is encouraging investments through increasing focus on schemes such as TUFS & TMC and cluster development activities

Public-Private Partnership (PPP)

The Ministry of Textiles commenced an initiative to establish institutes under the public-private partnership (PPP) model to encourage private sector participation in the development of the industry

Technical textiles

Technical textiles, growing at around twice the rate of textiles for clothing applications, now account for more than half of total textile production

Strong demand & policy support driving investments


Growing demand Policy support

Increasing investments
Growing domestic and foreign investments

Rising demand in exports

100 per cent FDI in textile sector

Increasing demand in domestic market Growing population driving textile demand

Government setting up SITPs

Commitment of USD140 billion of foreign investments

Increasing loans under TUFS

Inviting

Resulting in

Foreign investments flowing in; M&A activity up


M&A scenario details Period: 1 January 2000 to 30 June 2011 Top 5 deals 1 2 Acquirer Name Krishnaa Glass Pvt Ltd AAA United BV

Target Name Soma Textiles & Inds Ltd Bombay Rayon Fashions Ltd

Largest deal (USD mn) 6001.5 968.0

3
4 5

BR Machine Tools Pvt Ltd Bombay Rayon Fashions Ltd


Group of investors Spentex Industries Ltd Provogue (India)Ltd Indo Rama Textiles Ltd

721.1
526.9 447.6

From January 2000 to June 2011, 482 M&A deals have taken place The top five M&A deals* are listed above

Foreign investments flowing in; M&A activity up

200 180 160 140 130 160 140 129

FDI in the textile industry stood at USD 129 million in FY11

190

CAGR of FDI in the sector during the period was 60.3 per cent

120 100 90

80
60 40 20
**Growing FDI in textile industry (In USD million)

54 40

FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11

Opportunities
Immense growth potential
The Indian textile industry is set for strong growth, buoyed by both strong domestic consumption as well as export demand For the near term (2012), the sector is valued at USD110 billion by the Confederation of Indian Textile Industry (CITI)

Private sector participation in silk production


The Central Silk Board has set a target of 28,000 tonnes of raw silk production by 201213

Technical textiles

Technical textile market estimated at USD12 billion in 2012

To achieve these targets, alliances with the private sector, especially major agro-based industries in pre-cocoon and post-cocoon segments, is being encouraged

Indias technical textile industry is mainly dominated by unorganised players. However, it is an emerging area for investment with good growth potential The market is likely to grow to USD31 billion by 2020, implying a CAGR of 10 per cent

Estimates put the sector market value at USD 220 Billion by 2020

Opportunities
Retail sector offers growth potential
With consumerism and disposable income on the rise, the retail sector has experienced a rapid growth in the past decade with several international players like Marks & Spencer, Guess and Next having entered Indian market The organised apparel segment is expected to grow at a compound annual growth rate (CAGR) of more than 13 per cent over a 10-year period

Centres of Excellence (CoE) for research and technical training


The CoEs are aimed at creating testing and evaluation facilities as well as developing resource centres and training facilities. Further fund support would be provided for appointing experts to develop these facilities Existing four CoEs, BTRA for Geotech, SITRA for Meditech, NITRA for Protech and SASMIRA for Agrotech, would be upgraded in terms of development of incubation centre and support for development of prototypes

Foreign investments

The government is taking initiatives to attract foreign investments in the textile sector through promotional visits to countries such as Japan, Germany, Italy and France

Impact of Union Budget 2012 - 2013

Union Budget - Proposal and Impact


Budget proposals Hike in standard excise duty from 1%, 5% and 10% to 2%, 6% and 12% on various items Impact on the industry The hike in excise duty on cotton-based products from 5% to 6% is not expected to have any significant negative impact on cotton textile players since the excise duty on cotton-based products is concessional and optional. The hike in excise duty on textile products other than cotton-based products from 10% to 12% is expected to increase the cost of production for non-cotton textile players.

Hike in excise duty The hike in excise duty on branded readymade garment on branded from 10% to 12% coupled with an increase in abetment readymade from 55% to 70% would result in a net decline in effective garments from excise duty from 4.5% to 3.6% which is expected to result 10% (with 55% in marginal benefit to readymade garment manufacturers. abetment) to With falling cotton prices and proposed reduction in 12% (with 70% effective excise duty, the prices of cotton-based branded abetment) readymade garments is expected to come down which would lead to boost in demand.

Union Budget - Proposal and Impact


Budget proposals Exemption of customs duty for new automated shuttle looms Impact on the industry The exemption of new automated shuttle looms from customs duty is expected to boost investments and capacity addition in weaving and garment sectors which may increase competition considering the fragmented nature of the industry.

Note In Union Budged 2012-13, the government has announced a financial package of Rs. 3,884 crore for waiver of loans of handloom weavers and their cooperative societies.

Domestic Growth Drivers


Increasing retail penetration
Textiles and clothing retail comprise of 40% of Indias organized retailing Share of organized retailing to increase from about 5% currently to about 24% by FY 2020

Higher disposable income

Consistent increase in per capita income of the masses Consumption of textiles expected to increase to about 11% CAGR

Higher percentage of working women

Propensity to spend in working women higher by around 1.3 times compared to a housewife Population of working women increased to about 32% from 26% in 2001

Increase in nuclear families

Avg household size decreased to about 5.0 from 5.36 in 2001 As a result, per household consumption is increasing

Favorable demographic profile

Rise in percentage of earning population (15 60 years) to about 60%

Domestic Growth Drivers


Higher growth in urban population
Urban population growing gradually Favorable demography coupled with rising urban population and income levels will act as a key growth factor for the Indian textile and apparel Industry

Increased usage of credit cards


More spending capacity

Sustainable real GDP growth outlook of around 7% p.a. Rising disposable income for rural consumers
Rising agriculture income & increased employment generation to drive the demand of basic textile products

Increasing industrial output, rising disposable income, vibrant construction activity etc., to drive demand for home textiles

Export Growth Drivers


Textile manufacturing continues to shift to low cost Asian countries

Increasing cost of labor, Chinas growth restricted


scarcity of raw material & power, rising domestic demand Buyers need to diversify sourcing risk Availability of raw materials, especially cotton, integrated operations and design skills in India Favorable demographics, rising income and population levels, and rising retail penetration in other developing countries (other Asian countries, Latin America etc.)

Future Trends
After three months of sharp downturn, registration for yarn exports shot up by 17.8 per cent in May on renewed demand from the traditional markets, including North America and Western Europe

Fresh demand from other markets, such as Latin America , Russia, Japan and Africa.
US non-apparel sector (yarns and fabrics) recorded a staggering 19.5 per cent growth in Jan-April 2012. Carpets shipments grew at an average rate of over 10 % Government has revised upwards the textiles export target to $40.5 billion for 2012-13.

Zero per cent duty Export Promotion Capital Goods (EPCG) Scheme for technology upgradation extended till 31 March, 2013
Market-linked focus product scheme was also extended till the end of the current fiscal for exports to the US and the European Union in respect of the apparel sector

Investments Required
In order to capture the additional market (US$ 150 Bn) created for Textile and Apparel by 2020, investments to the tune of Rs. 3,20,000 crores (US$ 68 Bn) across the textile supply chain will be required
Segment
Spun Yarn Filament yarn

Additional Production
3.9 Bn. kg 5.8 Bn. Kg

Additional Capacities Required


New Spindles 13.6 million Modernized Spindles 8 million Production from modernized capacity 0.5 Bn. Kg Production from brownfield expansion 4.2 Bn. Kg Production from greenfield projects 1.1 Bn.kg New Shuttle-less Looms 77 thousand Second hand Shuttle-less Looms 65 thousand Semi-automatic 2 Lakhs Plain 2.35 Lakhs New Machines 84 thousand Second hand Machines 56 thousand

Investment Reqd (In Rs. Crores)


42,000 31,000

Weaving

50 Sq. m.

37,000

Knitting Processing

76 Bn. Sq. m. 95 Bn. Sq. m.

25,000 90,000

Garment and Made-ups


Technical Textiles

38 Bn. Pcs
30,000

Machines required 21 lakhs (for 2 shift working)

65,000
30,000

Total

320,000
Source: Technopak

Future Trends

Slow economic recovery and price competition from Bangladesh, Pakistan, Vietnam etc. Though Bangladesh is a competitor in price, it is heavily dependent on India for raw materials (like Cotton).

High raw- material prices, high interest rates, besides demand slowdown in its major markets caused downturn last year Medical, geo-textile, protective textiles & agricultural textiles are the growing segments

Thank You!

Appendix

Textiles Export during 2007-08 to 2011-12 ( Till Feb.'12) (Item wise)


(Eleventh Five Year Plan Period - 2007-2012)

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