Despite minor disruptions in Q1, outlook for the Indian textile sector for the remainder of fiscal 2021-22 remains bright as revenues are likely to increase with improving operation margins due to strong demand, says latest India Ratings and Research report. Domestic demand and exports is likely to sustain in the remaining months of FY22, leading to improved YoY sales volumes. The outlook for remainder of FY22 is likely to remain stable as profitability is likely to improve. Operating cash flows will improve despite an increase in working capital requirement on the back of higher sales volumes and increased capital expenditure.

The ratings have already factored in the benefits of integrated business operations, healthy balance sheet liquidity and operating efficiencies over FY22. Sector players in the ‘IND A’ and above rating categories have been resilient to COVID-19-led disruptions on account of adequate-to-superior liquidity profile. Supported by strong operating cash flows in H1 FY22, Ind-Ra-rated portfolio witnessed an improvement in both liquidity and credit metrics. This led to the agency changing their rating Outlook to Stable from Negative on the small and mid-sized commodity pure-plays.

Domestic demand to remain vulnerable

Though domestic demand is likely to improve from H2 FY22, onwards, it would still remain vulnerable to further restrictions. Also, demand from spinning mills seems to be recovering during festivities. Segments such as cotton yarn and fabrics witnessed a higher YoY demand from downstream players during H1 FY22. The demand for woven fabric and apparel is likely to improve with the opening of retail shops and malls from H2 FY22.

Textile exports in the cotton and yarn segment improved during H1 FY22 with cotton yarn volumes increasing by over 45 per cent during M4 FY22 over FY20 and FY21. Export volumes are expected to remain higher for FY22 owing to the increasing demand for Indian yarn. Fabric and apparel exports are likely to sustain with the unlocking of economic activities and the adoption of China Plus One strategy by importing countries.

Exports to show moderate growth

Apparel and fabric exports increased by 87 per cent and 108 per cent, respectively during FY21 due to low base effect and reached pre-COVID levels. The agency expects these exports to improve moderately in H2 FY22 due to accelerated vaccination and China Plus One sourcing strategy. Exports are likely to improve from FY23 onwards. Demand will get a boost with ongoing impact of sourcing restriction on China (Xinjiang) cotton, predicts Ind-Ra.