Research points out that the Indian denim industry has overcapacity. To change this situation, it needs to focus on producing high-quality products.
“India Ratings and Research, Ind-Ra” analyst’s “Denim Industry Trends” report pointed out that India’s annual denim production capacity With an area of about 1.8 billion meters, it is one of the world’s major denim producers.
The agency pointed out that the strong demand for denim in India is mainly due to the increase in wholesale business and consumer demand for basic denim, as well as the increase in additional Export high-value denim and gradually increase the utilization rate of production capacity.
In fact, Mahaveer Shankarlal, deputy director of corporate ratings, said: Ind-Ra believes that the profit margin of the denim industry is gradually improving due to its focus on quality products and vertical integration.
While underlying denim overcapacity will persist in fiscal 2020-2022, improving demand prospects will consolidate the benefits of operating leverage and increase raw material costs Can be channeled to a certain extent.
The agency expects large and medium-sized denim manufacturers to continue to increase the proportion of premium and high value-added denim fabrics as the oversupply situation has been prolonged and squeezed profits in the mass market Rate.
In view of the late demonetization movement and the implementation of Goods and Services Tax (GST), coupled with the consolidation of unorganized small garment factories, denim manufacturers are also Increase their garment manufacturing facilities.
Given that current capital expenditure will take 2-3 years to stabilize, the existing level of overcapacity will not attract any industry players to initiate investment before fiscal year 2022, so Ind-Ra expects the industry to have the least amount of greenfield investment. (Note: “Greenfield investment” means that a multinational company establishes a company in the host country in accordance with the laws of the host country. Some or all of the company’s assets belong to foreign investors, also known as founding investment or new investment. This type of investment usually occurs in areas with a relatively high degree of industrialization. Low-income countries with less developed economies. For multinational companies, greenfield investment can allow them to maintain their greatest monopoly advantage and occupy the target market. However, due to the long construction cycle, slow speed, lack of flexibility, high risks, and uncertainty It is also relatively large, so it is not conducive to the rapid development of multinational companies.)
The agency estimates that the industry’s operating profit margin will moderately improve to 10-11%. However, rising cotton prices will hit corporate operating leverage and moderately increase the benefits of fiscal incentives. In addition, revised state tax relief and state incentive programs will consolidate margin recovery in fiscal 2020.
Overall, Ind-Ra expects the credit profile of denim fabric manufacturers to improve on the back of recovery in profit margins, operating breakeven and an increase in value-added product portfolio. Improved slightly in 2020.
Ind-Ra’s rating This investment portfolio includes Sangam India Limited (SIL) and Aarvee Denims and Exports Limited.
Sangam India Limited (SIL) is one of the three largest manufacturers of Polyester Viscose yarn in India, with a total production capacity of 238,608 spindles. Its operating income in fiscal 2019 grew 13% year-on-year to 18.736 billion rupees ($273.9 million), with further growth coming from increased production capacity for niche products. The company is increasing its focus on non-denim products, rope-dyed yarn for denim and capacity expansion in its seamless division.
Aarvee Denim & Exports Limited has an annual output of 85.7 million meters and has yarn production equipment. Sales fell 9% year-on-year to 7.516 billion rupees ($109.9 million) due to overcapacity in fiscal 2018 that led to a mountain of inventory and the implementation of the goods and services tax. Despite the decline in revenue and demand and low earnings before interest, taxes, depreciation and amortization (EBITDA), sales of wide-width loom fabrics were better, and the EBITDA profit margin of 10.9% in fiscal 2019 has further improved. The company has installed 124 new looms in 2019, and currently has 166 old looms that need to be updated. Ind-Ra estimates that as supply and demand in the denim market recovers, capacity utilization will grow moderately to 68-70% in 2020.
