Pent-up Demand Supports Textile & Apparel Recovery in 2QFY20-21: Ind-Ra
Indian textiles companies have significantly increased their plant capacity use in August 2020 with the easing of lock-down restrictions. The increase in demand in domestic and overseas markets will lead to recovery in textile and apparel industry during the second quarter (2Q) of FY20-21, says India Ratings and Research (Ind-Ra).
 
In a report, the ratings agency says, "We expect both the segments’ volumes to have corrected to 50%-80% in August 2020 and reach 70%-80% of normal over September 2020, led by pent-up demand and strong export order build up in all the segments. Both man-made fibres and cotton segments should start benefitting from the low raw material prices in 3QFY21. We expect raw material prices to remain moderate in 2HFY21."
 
Ind-Ra says it will continue monitoring the domestic demand recovery along with export markets in the US, Europe and China which are the major hubs for Indian textiles products.
 
According to the ratings agency, textiles players’ weak profitability over the first half (H1) of FY20-21, along with supply chain disruptions, has impacted cash flows; while the moratorium announced by the Reserve Bank of India (RBI) under the COVID-19 relief package has provided the inevitable liquidity support. However, the lifting of moratorium from 1 September 2020 without the full recovery in cash flows would require additional caution and monitoring of cash flows, it added. 
 
Ind-Ra says, "Some of such stressed issuers, mostly in the sub-investment grade rating category, may opt for the RBI announced one-time loan restructuring to survive the imminent liquidity challenges. We expect textiles players to record 15%-35% decline (year-on-year- y-o-y) in their top line and 20%-50% yoy drop in operating profits over FY20-21."
 
During August 2020, prices of textile products have recovered broadly from the lows of April-May 2020. International cotton prices (US) continued to recover in August 2020 by 4% month-on-month (mom), after dipping in April 2020. Indian cotton prices increased about 5% m-o-m in August last week, following a partial correction in the international prices over July 2020. Cotton arrival is almost complete in the current season while Cotton Corporation of India (CCI) continues to procure to support cotton prices. 
 
According to the ratings agency, plant utilisation of pure man-made fibres and yarn manufacturers was severely impacted over 1QFY20-21 amid the COVID-19-led lock-down. However, it says, volume recovery of pure man-made fibres and yarn should be quick but has started relatively late from August 2020, while the cotton and blended spinners’ volumes have started recovering from June 2020.
 
Fibre and yarn prices have been steady in August 2020, while discounts are also offered in few segments to boost sales. Cotton yarn and blended yarn prices largely remained flat in August 2020, despite demand recovery as the supplies also increased steadily. Moreover, margins of large spinners could remain under pressure as their cotton season procurement was at about 10% higher prices and operating utilisations are still below optimum levels.
 
Ind-Ra says it expects fabric and apparel prices to have declined in August 2020, led by a quick supply restoration than demand recovery. During July-August 2020, most players have resorted to discounts to boost sales and also generated the much-required internal liquidity. Disbursement of COVID-19 bank loans and promoter-led infusions also supported liquidity and the ability of fabric and apparel players to ramp up operations quickly in these segments. Ind-Ra expects apparel prices to remain modest in 2HFY20-21 to push sales. 
 
Readymade garments exports recovered significantly starting June-July 2020, the ratings agency says, adding, that order book build up in August 2020 was strong, supported by restocking at global retailers and global sector consolidation. "Large Indian players are benefitting from the shift in market share to India from China. Large apparel and readymade garment manufacturers have largely been able to resolve labour mobility and availability concerns," it added.
 
According to Ind-Ra, demand for home textiles has been only moderately impacted as they are necessary products for day-to-day life. However, it says, US-China trade war has impacted imports from China into the US, thus giving a strong push to exports from India. 
 
"We expect the demand for home textile exports to sustain in 2HFY21 at healthy levels achieved over August-September 2020. We also expect Indian players to increase their already strong market share in terry towels and bed linens, led by supply chain diversification away from China," the ratings agency concludes.
 
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    Battered Residential Realty Demand to Halve This Fiscal; Price Correction of 5-15% Possible: CRISIL
    The already languishing residential real estate demand is expected to plunge 50%-70% on year in the current fiscal, with the coronavirus (COVID-19) pandemic crushing economic activity and with it, big-ticket spending and it has become survival of the fittest as small to mid-sized developers stare at huge funding gap, says a research note.
     
    In the report, ratings agency CRISIL says, "As a result, the credit profiles of small-to-mid-sized and leveraged developers will be impacted than larger, experienced developers with healthy balance sheets. With demand going down, capital values will remain under pressure across cities. We expect a price correction of 5-15% across ticket sizes."
     
    According to Isha Chaudhary, director at CRISIL Research, lowering capital values and attractive interest rates augurs well for affordability, which has improved by 10%-30% across cities during the past five years- as measured by CRISIL's proprietary index MAHTI1. 
     
     
    "Despite improved affordability, demand translation will be feeble led by income uncertainty arising from pandemic coupled with weak investor sentiment emanating from pressure on capital appreciation or rental yields in the sector over past few years," she says.
     
    While demand for new units will see a sharp decline, the ratings agency says the blow to customer collections will be cushioned by advances against already sold inventory realised in line with construction progress. 
     
    The report says, "The one-time relief for Real Estate Regulatory Authority (RERA)-registered projects would provide players an option to manage outflows through flexibility to delay construction spend. Postponing capex and land banking plans could be another way. However, overall funding requirements are expected to rise as the hit in collections is expected to be far steeper than the decline in outflows due to deferred construction."
     
    That said, the ratings agency sees large diversified players with strong delivery track record are expected to manage better as indicated by an analysis of the top 10 CRISIL-rated developer groups.
     
    Sushmita Majumdar, director at CRISIL Ratings, says, “Larger, established developers have ample financial flexibility, with debt-to-total assets ratio (a measure of leverage) estimated at a five-year low of about 30% as of end-fiscal 2020. Many will also have access to steady income from operational commercial assets. We estimate the increase in funding requirements for these players at only 15-25% higher than pre-pandemic estimates.”
     
     
    The situation, however, is far bleaker for developers on the other side of the spectrum, as per CRISIL’s analysis of more than 100 small developers and single-project special purpose vehicles (SPVs).
     
    It says, "Small-to-mid-sized developers will face a sharp about 200% rise in funding gap this fiscal. But their ability to borrow or raise capital is limited as debt-to-total assets ratio is significantly high at around 75% as of March 2020. Interest cover is also weak, at 1.2-1.5 times versus ~2.0 times for the large developer groups."
     
    Given tight liquidity, the ratings agency sees some of these players vying for tie-ups with larger established names by way of joint ventures, joint development agreements, and development models to benefit from their processes and financial flexibility, or resort to distress sale of assets to raise funds.
     
    "Demand for the sector has been subdued over the past decade, on account of a raft of factors: demonetisation, unaffordability, delay in completions. While income and employment generation remain monitorable, a mild recovery in residential demand might be expected in second half of the current fiscal, in the baseline case," CRISIL concludes.
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    COMMENTS

    shankar_1979

    1 week ago

    Constructed Real estate sector has been in a zombie state, with low rental yields, low appreciation, low earning power of people and high prices. While rate decreases have been predicted before throughout the past decade, it did not happen. Unfortunately the sector is bound to stay like this for even more time. However investors have continued to lose wealth on a nominal basis (after taxes, maintenance costs, and interest payments) for a long time now.

    Toyota Blames High Taxation for Halting Expansion in India: Report
    Blaming high tax regime, Japanese auto-maker Toyota Motor Corp has decided not to expand its operations in India. While its Indian unit, Toyota Kirloskar Motor Pvt Ltd, will remain in business, it will not scale up operations, a senior executive of the company told Bloomberg.
     
    Quoting Shekar Viswanathan, vice chairman of Toyota Kirloskar Motor, the report from BloombergQuint.com says, "The (Indian) government keeps taxes on cars and motorbikes so high that companies find it hard to build scale. The high levies also put owning a car out of reach of many consumers, meaning factories are idled and jobs are not created."
     
    “The message we are getting, after we have come here and invested money, is that we don’t want you,” Mr Viswanathan said in an interview, adding, "In the absence of any reforms, we won’t exit India, but we won’t scale up.”
     
    Toyota Kirloskar Motor is the fourth largest car-maker in India after Maruti Suzuki India Ltd, Hyundai Motor India Ltd and Mahindra & Mahindra Ltd (M&M). Toyota Kirloskar Motor is a joint venture between Toyota Motor Corp and the Kirloskar group. Toyota holds 89% stake in the joint venture, while the balance 11% is owned by Kirloskar group.
     
    In India, goods and service tax (GST) is levied at 28% on car and bikes.
     
    In addition, there is a cess ranging from 1% to 15% levied by the government, depending on the class of the vehicle. 
     
    As is the practice in the automobile market, manufacturers and dealers offer lot of free goods or services or warranty to attract buyers in a very competitive business. Prior to GST, all such free goods or services were not taxed. But all these are now eligible for taxation under the GST. Since customers are reluctant to pay tax on free goods or services, it is the auto-maker or dealer who has to bear the burden of this additional tax.
     
    “You would think the auto sector is making drugs or liquor,” Mr Vishwanathan from Toyota Kirloskar told Bloomberg, adding "Such punitive taxes discourage foreign investment, erode automakers’ margins and make the cost of launching new products 'prohibitive'."
     
    According to data released by the Society of Indian Automobile Manufacturers (SIAM), during August 2020, a total of 215,916 passenger vehicles were sold in the domestic market, representing a rise of 14.16% from 189,129 units offtake during the like period of 2019.
     
    However, according to Federation of Automobile Dealers Associations (FADA), vehicle registration during August continues to remain down by 27%, with the Indian economy continuing to battle with coronavirus (COVID-19) pandemic.
     
    FADA says while original equipment manufacturers (OEMs) are dispatching vehicles to dealers with a purpose of stocking-up inventory for the upcoming festival season, retail sales are still at 70%-75% levels, despite the low base of last year. FADA says it advises extreme caution to all OEMs and its dealer fraternity to avoid excessive inventory build-up, thus leading to unmanageable interest cost which could further result in dealership closures.
     
    FADA says it had once again requested the government to announce demand boosting stimulus and awaits the announcement of reduction in GST, especially for two-wheelers.
     
    Toyota Kirloskar Motor is, however, facing more taxes as it is largely pivoted towards hybrid vehicles. Since these are not pure electric vehicles (that attract 5% tax) the auto-maker ends up paying as much as 43% tax on its hybrid vehicles.
     
    The Indian government is doling out all benefits like lower tax for electric vehicles (EVs), without even looking into infrastructure (read charging stations) for these vehicles. In the Union Budget for 2019-20, the government announced to provide additional income-tax (I-T) deduction of Rs1.5 lakh on the interest paid on the loans taken to purchase EVs.
     
    No such benefits are available for other vehicles that run on petrol, diesel or are hybrid vehicles. These vehicles are not only affordable but can be refuelled and serviced in any corner of the country. The same cannot be said for EVs. So, while auto-makers have the capability and are producing vehicles other than EVs, they are burdened with higher taxes.  
     
    In September 2014, prime minister Narendra Modi had launched his much ambitious 'Make in India' initiative to encourage companies to manufacture in the country and incentivise dedicated investments into manufacturing.
     
    According to a September 2018 McKinsey report on 'The auto component industry in India: Preparing for the future', clubbed with growing income levels, it was expected that India’s consumer class will expand, leading to higher spending on more and better vehicles across segments – providing automotive companies with a ready-made market.
     
    The Automotive Mission Plan (AMP) 2026 sees automotive industry in India to grow 3.5 – 4 times to $260 billion to $300 billion from the current value of $74 billion, generate 65 million jobs and contribute over 12% to India's gross domestic product (GDP).
     
    While this picture looks rosy, auto-makers are, however, struggling with higher taxes.
     
    Vehicles are no more luxury in India, which has a dearth of good, reliable public transport network with few exceptions. However, for the taxmen, buying and owning a vehicle is a luxury and so a 28% GST as well as cess is levied. We are not even talking about running cost of vehicle, especially the fuel cost, which is reaching new limits, despite lower crude oil prices as the Union and state governments are not ready to lower taxes. In fact, they have increased taxes on fuel to make good lower collection of revenues from all other sources. This makes buying and maintaining a vehicle more costly, as can be seen lower sales or registration volumes in the automobile market.  
     
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    COMMENTS

    Newme

    1 week ago

    43% tax is daylight robbery.

    mudit3

    1 week ago

    India is a highly overtaxed country with low import duties on industrial goods making it a haven for cheap imports So many representations are with the various ministries but none have been implemented. The slogan in reality is "the world makes for India."

    s5rwav

    1 week ago

    More the Taxes on Bigger Size Petrol and Diesel & CNG Driven Vehicles in India or, for that matter anywhere in the world, is good while the Taxes on Electric Vehicles Must be Low in the Interest of Climate Justice to Our Planet Earth. I am Babubhai Vaghela from Ahmedabad. Thanks.

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