Shake-out in textiles

Until six months ago, companies operating in the textile town of Tirupur, 80 km from Coimbatore in Tamil Nadu, were an extremely bullish lot-they were buoyed by the lifting of quotas, riding burgeoning order books and clocking annual growth rates of 15-18 per cent. Since then, however, there has been a drastic change in their fortunes.

The near 10 per cent appreciation of the rupee against the dollar has whittled margins and coincided with the emergence of lower-cost destinations such as Bangladesh and Vietnam. Result: many Indian textile exporters are languishing with up to 50 per cent unutilised capacities as customers quickly jump ship to lower-cost alternatives. "Our transaction costs are high and buyers are not willing to pay this higher price," says A. Sakthivel, President of the local exporters' association in Tirupur and Chairman of Poppy's Group, a large exporter.

A few kilometres away from his factory, Royal Classic Mills Managing Director R. Sivaram says: "The steep appreciation of the rupee has resulted in a 12-14 per cent drop in realisations; this has impacted profit margins. Since we operate on 8-10 per cent net margins, most of us have suffered cash losses." A recent survey by Confederation of Indian Industry (CII) estimates that the strong rupee has resulted in an 8-9 per cent decline in revenues and profits for the country's textiles and apparel exporters; more worrying is the projection that this figure could go up to 10.4 per cent over the next six months.

Taking Root

India's $20-billion (Rs 82,000-crore) garment and textile export industry is in the throes of a full-blown crisis. During the first quarter of the current financial year, textile exports fell to $5 billion (Rs 20,500 crore), a massive 33 per cent lower than the targeted figure of $7.5 billion (Rs 30,750 crore) and a measly 9 per cent higher than the figure of $4.6 billion (Rs 18,860 crore) for the previous corresponding period. In 2006-07, the country exported textile goods worth $19.62 billion (Rs 80,442 crore) against the target of $19.73 billion (Rs 80,893 crore).

"The appreciation of the rupee was completely unexpected and caught even the largest players off guard. This was compounded by the rise of competing locations such as Bangladesh, which has overtaken India in textile exports," says Premal Udani, President, Clothing Manufacturers Association of India, the industry's apex body. "Costs in Bangladesh are 50 per cent lower than in India, and most of the low-value market has already moved there," says Rajendra Hinduja, Managing Director, Gokaldas Exports, who has sold his company to private equity firm Blackstone, but will retain his position for at least a couple of years under the deal.

Most large and mid-size exporters cannot absorb anything more than a 2-3 per cent appreciation of the rupee. Adds Sudhir Dhingra, Chairman and Managing Director, Orient Craft, a Delhi-based garment exporter: "Customers are not willing to pay higher prices; as a result the industry is losing a lot of business." Others such as the Ludhiana-based Nahar Spinning Mills have also seen its bottom line erode. Says Dinesh Oswal, Managing Director, Nahar Spinning Mills: "The competition from China and other Asian countries has affected the bottom lines of Indian companies."

Wal-Mart: Mixed response to retail giant

Wal-Mart, the US retail major, is interested in sourcing more textile products from India, but this has evoked mixed reactions from Indian players. Wal-Mart's policy of squeezing its suppliers has become legendary around the world, and this is causing misgivings in the minds of some Indian textile companies.

Sonal Garments India, a leading exporter which used to deal directly with Wal-Mart till a few years ago, is lukewarm to the idea. Says Pravin Kumar Agarwal, Director, Sonal Garments India: "We are not comfortable with its pricing policies." Then, players dealing in the premium segment are understood to be staying away from Wal-Mart for the same reason.

However, Dilip Jiwrajka, Managing Director, Alok Industries, an integrated textiles company, holds a contrarian view. "Wal-Mart is a good customer to have and pays for efficiency. Margins are relative; if you are not able to deliver on the efficiency factor, you will face margin problems." Wal-Mart has been a customer of Alok Industries in the international market for almost 10 years and both are keen on extending this relationship to the domestic market as well. "It will be a natural progression for us," says Jiwrajka.

Even in the US, Wal-Mart evokes strong reactions. In India, it is no different.

Body Blow

Not surprisingly, some players, like Gokaldas Exports and Leela Scottish Lace, have sold out. "The rising rupee had little role to play in the decision to sell out to (private equity giant) Blackstone, since we started negotiations back in January this year, well before the currency spike set in," says Hinduja.

Despite his contention, the numbers tell their own tale, since Gokaldas' profits were down 2 per cent during the first quarter and margins, too, were on the wane. "We took 30 years to reach revenues of Rs 1,000 crore and wanted to step this up to Rs 2,000 crore fast; and private equity money provided a simple way of making the jump," he adds.

In Mumbai, Leela Scottish Lace, once owned by hospitality group Leela Ventures, was bought out by Bombay Rayon for Rs 155 crore in July this year to bolster its capacity. "Our garment making capacity is being increased from 64,000 units per day to 150,000 units per day.

Leela Scottish Lace's garments business had good facilities, a strong and growing business, a turnover of around Rs 400 crore, an EBITDA margin of around 12-13 per cent and employee strength of around 22,000 across Bangalore, Chennai and Thiruvananthapuram. So, it made sense for us to acquire it," says A.R. Mundra, Executive Director (Finance), Bombay Rayon, which counts leading global labels such as DKNY and Liz Clairborne as its clients.

Others, who have resisted the urge to sell out, have, however, put their expansion plans on hold. The Rs 300-crore Sonal Garments, a Mumbai-based exporter of casual woven and knitted garments, is one such player. "The Indian textiles industry is at the crossroads; bottom lines are under tremendous pressure. We have, therefore, put on hold all our expansion plans," says Pravin Kumar Agarwal, Director, Sonal Garments.

Beyond the Rupee

Exporters say it will be unfair to blame the entire crisis on the appreciating rupee alone. "Critical issues such as outdated labour laws, high infrastructure costs and lower labour productivity have been brushed under the carpet because of the outcry over the rupee," says CMAI's Udani. Industry veterans such as Gokaldas' Hinduja say that at Rs 45 per day, Bangladesh's labour rates are the lowest globally.

"Ninety per cent of the low-cost market has gone there and it will be no surprise if cost-conscious clients continue to flock to that country," he grumbles. In India, the minimum daily wage in the textiles industry is Rs 100. At the same time, high infrastructure costs (textile exporters in Bangalore, for example, pay Rs 4.75 per unit of power, compared to Rs 3 per unit in China and Rs 4 per unit in Bangladesh) are also hampering growth, he adds.

"And Chinese factories work for 12 hours daily, have no infrastructure or labour concerns and are, therefore, more productive than us," says Hinduja. Indian workers, typically, put in eight hours a day.

"We will cushion the impact of the rising rupee"

The appreciation of the rupee against the dollar is pinching the textile industry where it hurts most-in the pocket. This has already shaved 36 per cent off the targeted textile exports in the first quarter of this year, BT's Manu Kaushik met Union Textile Minister Shankersinh Vaghela to discuss the problem. Excerpts:

What is the Ministry of Textiles doing to cushion the impact of the rising rupee?

The rupee is rising because of macro-economic factors, but my ministry will soon announce subsidies and long-term development programmes that will help minimise its impact.

What kind of benefits are these?

The government has announced a reduction in duty drawback rates, credit subsidies through reduced interest rates, and swifter reimbursement of tax refund claims. We are also setting up integrated textile parks for entrepreneurs. About 30 such projects are likely to be operational by 2008. These have been sanctioned over the last 18 months. Then, the Technology Upgradation Fund Scheme (TUFS) has made finance more readily available to SMEs.

Indian exporters are losing business to China. How will you tackle this?

China has a controlled economy and this allows textile exporters there to grow. They have a leg-up over India as most of the companies are state-owned. Also, the government of China strongly controls its currency and doesn't allow it to appreciate. Chinese companies also enjoy comparatively cheap power and labour rates. To bring in more competitiveness, the domestic exporting units should focus on cutting down unnecessary expenditure and improve their efficiency through training and motivation.

Hinduja is voicing the concerns of the entire industry. "It is virtually impossible for Indian companies to match China on costs," says Jayesh K. Shah, Director and Chief Financial Officer, Arvind Mills, one of the country's largest apparel producers and exporters. Others such as Dhingra of Orient Craft argue that ever since quotas were lifted, Indian exporters have had to complete on an even footing with players from competitive markets such as China, Bangladesh, Sri Lanka and even The Philippines. "Margins in the textile industry have been under pressure for the last couple of years.

It is possible that more and more companies will now look at low-cost countries to build manufacturing capacities as a medium-to-long-term solution. And it is also possible that if the problem persists for a longer period, we will not be able to service our clients properly," he predicts.

Helping Hand

With the textile industry in the throes of a seemingly full-blown crisis, the Union Government has stepped in, albeit a bit late, to try and lend a helping hand. "The government has reduced duty drawback rates, offered credit subsidies, capital subsidies and facilitated swifter reimbursement of tax refund claims," says Union Textile Minister Shankersinh Vaghela in an interview with BT (see "We Will Cushion the Impact of the Rising Rupee").

But Orient Craft's Dhingra believes that it needs to do a lot more. "The government should revert to the practices it was following 10 years ago-when it was giving cash incentives, duty drawbacks and other incentives to the exporting community. Otherwise, there is a real danger of India losing a lot of business," he says.

But Rajinder Gupta, CEO, Trident Group, a Ludhiana-based Rs 1,500-crore yarn spinning company, says it may already be too late. "The government should provide financial support and foreign currency loans to exporters. Since Ludhiana, and other inland textile centres, are far away from the coast, it should also provide subsidies on the movement of goods to the ports," he says.

Looking Within

Aside from government incentives, several textile companies say the way forward will be to re-orient their businesses towards higher-value products and the domestic market. "The industry needs to move away from products that rely on speed of manufacture to those that are at the cutting edge of design," says Hinduja. This means graduating from plain shirts and trousers to winter-wear (jackets, wind cheaters, etc.), sportswear, industrial clothing and formalwear and finally, to branded garments. Says Sivaram of Royal Classic Mills: "The initial expenses of building brands are high, but it provides better realisations in the long run."

With the rupee widely expected to settle at around 40 to the dollar, it may be time for Indian textile companies to shape up or ship out.

(additional reporting by Anusha Subramanian and Manu Kaushik)