Indian Textile Industry

One of the leading Textile Industry in the world Contributes about 14 percent to industrial production of India 4 percent to the GDP of India 17 percent to the country's export earnings Direct employment to over 35 million people Second largest provider of Employment after Agriculture

History
India is traditionally strong in textile production capabilities and in raw materials because of its strong relation with agriculture for natural fibers Indian textile enjoys a rich heritage and the origin of textiles in India traces back to the Indus valley Civilization where people used homespun cotton for weaving their clothes Tata, Ambani, Birla all have started their business lives from the textile industry

Post Independence Era

Strong Inward-looking policy Decades of restrictive government policies & Strict Industrial Licensing Regime Favoured Small scale operations only, lead to decentralized individual sectors. The processing and weaving sectors in particular are highly fragmented and technologically less advanced.

Post Liberalization
Industrial Policy 1991 relaxed several licensing requirements, raised the maximum limits on allowable investment and reduced import controls Businesses were also encouraged to modernize their technological base However, the sector remained largely stagnant and decaying during the 1990s when several large mills closed and several traditional entrepreneurs moved out of the textile trade It received a real boost only in the past five-six years as the general economy has substantially improved, leading to a surge in demand

Multi Fibre Agreement (MFA)

The Multi Fibre Arrangement (MFA) governed the world trade in textiles and garments imposing quotas on the amount developing countries could export to developed countries 1974 2004 Developing countries have a natural advantage in textile production because it is labor intensive and they have low labor costs However it turned out to be fatal to the developing countries like India, eating into their profits in a huge way. The system has cost the developing world 27 million jobs and $40 billion a year in lost exports.

Post MFA
Indian Textile Industry is going through a major change in its outlook after the expiry of Multi-Fibre Agreement Increased investments into textile projects The removal of the quota system has brought the strong players in full swing Increased Competition from China and Korea Increased Government Policies for its rapid growth

Government Regulations
Ministry of Textiles in India is responsible for policy formulation, planning, development, export promotion and trade regulation in the textile sector Established Technology Upgradation Fund Scheme(TUFS) Scheme for Integrated Textile Park (SITP) Allocation of huge Budget amount to handicrafts and handlooms Mega clusters in handlooms, handicrafts and powerloom sectors Reduction in corporate tax rate from 35% to 30% with 10% surcharge. 100% FDI Allowed Numerous Other Policies for Individual Sectors

Vertical Integration
Cotton Textiles Silk Textiles Woollen Textiles Readymade Garments Hand-crafted Textiles Jute and Coir Cultivating and Harvesting (Natural Fibers) Preparatory Processes Manufacture of Artificial Fibers Spinning Weaving Processing and Finishing Marketing

INDUSTRY ANALYSIS Porters Five Forces

Threat of New Entrants

Bargaining power of Suppliers

Competitive Rivalry within the industry

Bargaining power of Customers

Threat of Substitutes

Concentration ratio
4 firm concentration ratio
0.2 0.18 0.16 0.14 0.12 0.1 0.08 0.06 0.04 0.02 0 0.3 0.25 0.2 0.15 0.1 0.05 0

8 firm concentration ratio

Competition
In the year 1995, WTO had renewed its Multi Fiber Agreement and adopted Agreement on Textiles and Clothing (ATC) which stated that all quotas on textiles and clothing shall be removed among the WTO member countries by 2005 the Indian textile and clothing sector received an insignificant FDI inflow of only US$ 450.02 million between 1991 and March 2006, amounting to just 1.16 per cent of total FDI of US$ 38.96 billion The weak presence of major buyers such as Wal-Mart, Sears, Nike and Liz Claiborne hindered the organization of the domestic product towards substantive exports.

Herfindahl Index
HHI
200

180
160 140 120 100 80 60 40 20 0 HHI

Competition
The MFA phase out had a very controversial impact on the operating profits of the firms Some firms continuously earned profits whereas some ran into losses The open market situation, with the abolition of the quota system, the global textiles market is witnessing tough competition situation. The firms with large scale capacity and a sound capital base are able to fight the situation and sustain their profits.

Major players over the years

140000 120000

100000

Grasim Industries Ltd. Century Enka Ltd.

80000

Raymond Ltd.
Bombay Dyeing & Mfg. Co. Ltd. J C T Ltd.

60000

Madura Coats Pvt. Ltd. Indo Rama Synthetics (India) Ltd.

40000

Vardhman Textiles Ltd. Arvind Ltd. Alok Industries Ltd.

20000

Sales over the entire industry

1400000 1200000

1000000

Others Alok Industries Ltd. Arvind Ltd.

800000

Vardhman Textiles Ltd. Indo Rama Synthetics (India) Ltd.

600000

Madura Coats Pvt. Ltd. J C T Ltd.

Bombay Dyeing & Mfg. Co. Ltd.

400000 Raymond Ltd. Century Enka Ltd. Grasim Industries Ltd. 200000

Major Players
Grasim: Viscose Staple Fiber: VSF volumes fell 18.2% yoy in Q109,while realization rate declined 5.1% qoq. Demand for VSF slowed down due to the sluggishness in the US market and the substitution effect on account of high VSF prices. Alok industries: Robust growth on account of aggressive capacity expansions, strong volumes & healthy realizations; net margins impacted by mark-to-market forex losses Others: Highly fragmented small players owning bulk of the market.

BARGAINING POWER OF SUPPLIERS

Cotton-based Textiles India is the 2nd largest producer of cotton in the world - cotton fibre based textile products constitute around 60% of total textile products. About 70% of total cotton production is accounted for by the states of Gujarat, Maharashtra and Andhra Pradesh small farmers highly fragmented. Minimum Support Price set by government. Jute-based Textiles India is the major producer of both raw jute and jute products. India accounted for 60% of world production in 2007-08 highly fragmented sector. Man-made Fibres(MMFs) India is the second largest producer of man-made fibres in the world with presence of large plants having state-of-the art technology - MMF textiles constitute almost two-third of the domestic textile market. Raw materials like PTA, MEG are manufactured locally. Some materials like Acrylonitrile and rayon grade wood pulp are imported due to insufficient domestic production.

BARGAINING POWER OF CUSTOMERS

Large and fragmented domestic potential for both raw material manufacturers as well as textile manufacturers. Exports have increased by 60.14% from 20042005 to 2009-2010. Exports are affected greatly by the exchange rate, global economic scenario.

Indian Textile Exports in 2010-2011

France 5% Bangladesh 7% Spain Italy 5% 1%

China 5%

Turkey 4%
USA 36%

Germany 11% UK 12%

UAE 14%

THREAT OF NEW ENTRANTS

Industry is very fragmented no distinctive barriers to entry TUFS - for additional capacity building, better adoption of technology. Minimum Support price for natural fibers. Easy displacement of existing players Grasim Industries. Focus on technology upgradation, capacity expansion, operating efficiency, larger share of exports.

THREAT OF SUBSTITUTES
No obvious substitutes. Substitutes in terms of exports - intense competition from China and Bangladesh due to low cost of production.

SALES GROWTH
Textile Sales
1400000

1200000

1000000

800000

600000

400000

200000

SALES GROWTH - CAGR

LPG
25

Post MFA

20

15

NTPS & TUFS (1999)

10

1991-1995 1995-2000 2000-2005 2005-2010 1991-2000 2000-2010 1991-2010

ASSETS GROWTH
Textile Assets
1,800,000.00 1,600,000.00 1,400,000.00 1,200,000.00

1,000,000.00
800,000.00 600,000.00 400,000.00 200,000.00 Textile Assets

MARKET CAPITALIZATION
Industry Market Cap
800000 700000 600000 500000 400000 300000 200000 100000 0

MARKET CAPITALIZATION
800000 30000000 700000 25000000 600000 20000000 500000

400000

15000000

Industry Market Cap

Sensex Market cap

300000 10000000 200000 5000000 100000

0
Jan/91 Jan/92 Jan/93 Jan/94 Jan/95 Jan/96 Jan/97 Jan/98 Jan/99 Jan/00 Jan/01 Jan/02 Jan/03 Jan/04 Jan/05 Jan/06 Jan/07 Jan/08 Jan/09 Jan/10

Trends in RoS
median - Return on sales
0.12

I
0.1

II

III IV

VI

VII
Budget provision

NTP Raw mat. Tenth five year plan Post MFA policies by costs govt

0.08

0.06

0.04

0.02

Phase III
National Textile Policy 1999
Policy reforms in the textile sector Setting up textile parks Dealing with removal of raw material price distortions Modernisation of outdated technology

Phase VI
Post MFA period
Since January 1, 2005, the Textile and clothing industry has been fully integrated into the World Trade Organisation (WTO). For boosting the industry post MFA, the government has launched competitive progressive policies, whose salient features included Established Technology Up gradation Fund Scheme for its longevity through a Rs 4.35 billion$ allocation. Reduction in corporate tax rate from 35% to 30% with 10% surcharge. Reduction in depreciation rate on plant and machinery from 25% to 15%.

Phase VII
Budgetary provisions

To promote the exports and stimulate the industry the government has introduced a lot of sops. Some of the key measures were Reduction in customs duty from 5% to 3% Ten more countries came under Focus Market Scheme(special tax sops provided). Refund of service tax upto 10%. Credit targets of public sector banks revised upwards to meet the needs of sector. Guarantee cover provided upto 1 Crore.

RoA
0.14

I
0.12

II

III TUFS

IV TIDS

V SITP

VI Budget impetus

0.1

0.08

0.06

0.04

0.02

Phase III
Technology Upgradation Fund Scheme
Technology up gradation fund scheme was launched on 1999 Provide credit at reduced rates to the entrepreneurs both in the organized and unorganized sector. Propelled investments up to 1,66839 Crores.

Phase V
Scheme for Integrated Textile Park
In 2005 government of India launched Scheme for Integrated Textile Park (SITP) to create new textile parks of international standards at potential growth centres. 40 Integrated textile parks(ITP) were established with following facilities. Land, Machinery, Buildings, Infrastructure required for the parks are provided by government Central Govt. to provide one time financial assistance of 40% of the project cost (up to 40 crore for each Park) and technical support through reputed institutions as PMCs in establishing the Parks Sub sectors such as cotton ginning, spinning, texturing, weaving, processing, garmenting are covered.

MB Ratio
3

I
2.5

II
FDI

III
Rupee Apprec iation

IV
BT Cotton

V
Budget provisions

1.5

0.5

FDI Inflows(in million$) in textile industry

2000

2001

2002

2003

2004

2005

2006

2007

Textile 1.9 industry

4.5

45.9

18.2

38.8

79

117.5

40.1

Phase II
Huge FDI Inflows into textile industry

Phase III
Textile Exports effected by rupee appreciation.

Phase IV
Global slowdown BT Cotton issue

Phase V
Budgetary provisions made by government