Thanks to the notes sharing by @bharatbetpf, we went on to study Indian textile industry before concentrating on a single company since we believed that it is cyclical industry and with government’s push, this has a long way to contribute towards our exports. Here is the thread:
- The industry at glance: Textiles contribute 2% to the GDP, contributes to 12% of export ($45 bn) earnings but still contributes to only 5% of global textile trade. Despite these numbers, it employs a humungous 50mn people. China contributes around 40% of global textile exports
- Due to the signing of multi fibre agreement in 1974, there were import quotas on every category of goods for different trading partners. However, these quotas were abolished in 1995. India, however, was slow to catch up on the textile front
- Other neighbouring countries like Bangladesh, Vietnam and Cambodia were quick to catch up since they also had the labour and cotton arbitrage. Currently each of these countries contribute to 3%-5% of global trade
- Also one of the major impediments in the global exports for textiles is that India exports 20% of the textiles which is of low value. Hence there is a large scope of value addition
- One point to note is although are under cultivation and total cotton produce in India is humungous but the yield is one of the lowest in the world. Given the MSP’s provided by government to the farmers, the cotton price is 40% higher than that of China
- As mentioned earlier, the $44 bn exports comprises 30% of the $150bn textile industry In India. From the global perspective, $44 bn contributes 5% of global textile trade. EU, USA and China contributes towards 17%, 16% and 14% of export demand globally
- Coming to the value chain: the raw cotton is manufactured into yarn. Yarn is then manufactured into fabrics. Fabrics are then polished and printed and finally fabric is cut and stitched into ready made garments
- Yarn is manufactured via spinning, conversion to fabric happens via weaving. The most value is captured in final products. Cotton farmers get 60-70 per kg. Yarn manufacturers get it at 200 per kg and sell yarns at 320 per kg. Processed fabric is sold at 800-1000 per kg while retailers sell it at 2500-3000 per kg
- Of the total value of textile export ($900 bn), apparel contributes 60% followed by fabric at 18%. The export order of these apparels go to big textile industries which outsource their small manual work to small scale manufacturers
- India is the largest producer of cotton with 6mn tonnes. China is considerably close with 5.8mn tonnes per annum. However area under cultivation in India is 4times that of China. Hence yields of both India and China are 460 kg and 1800 kg per hectare respectively
- Regarding the cotton production, due to lockdown and sudden improvements of demand in global market, the cotton price rose from 40000 per candy to 1 lac per candy domestically. However with the situation improving, it has gone to 60000 per candy. Still it is at 40% premium to China’s prices
- Spinning mills are carrying minimal cotton inventory to avoid the losses marked by declining cotton prices. In order to control the costs, they are running at 50% capacity or mixing man made fibres
- Since spinning mills are backend players doing manual jobs for bigger textile players, they are unable to pass the increase in raw material prices to fabric manufacturer
- In case of cotton production, India has to work upon improving the yields so that MSP’s can be brought down to global price levels. At present, India uses cotton seeds which is 2 generation older as compared to western counterparts. Also proliferation of crop insurance would help farmers try new varieties to improve yields
- One area where India has made significant progress is in home textiles (particularly bedsheets and towels). India has overtaken China in terms of exports of high quality home textiles. This has been made possible due to technology upgradation and labour arbitrage
- In case of Europe, most players have migrated to specialised products in home textiles which leads to command better prices for Indian exporters
- In terms of opportunity, man made fibres present huge untapped potential for Indian markets. Man made fibres constitute 79% of global textile consumption. However it constitutes only 40% in domestic market
- Also global players like Nike are turning to sustainable options for their manufacturing of products. Hence fibres from recycled plastics get used in manufacturing the wares for these players
- Another area of growth is technical textiles which contributes $20.2 bn of Indian textile markets. Their use case includes airbags, high performance sports shoes, fishing nets, seatbelts, surgical dressing etc. It is expected to compound at 13% CAGR globally
- Telangana has provided incentives to set up technical textile manufacturing in terms of investment subsidy and reduced power tariffs, GST reimbursement etc.
- Indian textile industry faces certain disadvantages as compared to Bangladesh, Vietnam etc. Firstly power tariffs are 40% higher. Cotton is primarily grown in Maharashtra and Gujarat and then sent to Tamil Nadu where it is converted to yarns
- After that, it is sent to Rajasthan for fabric manufacturing. Finally it is sent to NCR, Punjab etc. for apparel manufacturing. To prevent this wastage of logistics, the government plans to set 7 mega textile parks with the initial outlay of 4500 crores
- This park would have whole textile value chain under one roof at reduced power tarriffs and tax benefits. This can lead to increased competitiveness in terms of pricing from neighbouring countries
- Also I had drilled down Monte Carlo as the next company to study. But due to their low pricing power, less differentiation from competitors and significant RPT’s, I have decided to drop it and instead study Ambika Cotton Mills as the next company. Suggestions welcomed for any significant player with good competitive advantage
https://twitter.com/manujindal2803/status/1617139542884220928
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