Gross margins in the Indian denim industry are expected to improve by three to four per cent this year. This may be possible because of gradual improvement owing to a focus on premium products and vertical integration. The return of wholesale and consumer demand for basic denim in the domestic market and exports of value-added denim may gradually improve capacity utilisation.

Denim, mostly fabric, capacity in India had suddenly shot up a few years ago. However, with annual exports being hardly 200 million meters to 250 million meters, the rest of the capacity was earmarked for the domestic market, creating a glut. This led to shrinking margins for even some of the top denim makers. However, with no new investment in sight and capacity rationalising, gross margins could improve this year. The excessive capacity that got accumulated over the years is now getting utilised gradually. Minimal new greenfield investments in the sector will not entice any players to start investing before fiscal ’22 given that the current capex will require two to three years to stabilise.

However, while the sector’s operating margins is expected to improve moderately to ten per cent to 11 per cent in fiscal ’20, inflation in cotton prices could offset the benefits of operating leverage and modest increase in fiscal incentives.