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Shanthi Venkataraman

TEXTILE company stocks are spinning new tales in the stock markets. Even when the bourses were looking drab, stocks such as Vardhaman Spinning, Raymond, Arvind Mills and Mahavir Spinning were bright and looked especially so as they were in the limelight after languishing for several years. The imminent opening up of the export markets without the fetters of the quota system, the strong demand for fabric from the garment sector and the slew of policy initiatives by the Government to revitalise the industry are key factors that have led to a more favourable business environment and enhanced investor interest.

At the company-specific level, capacity expansions to ensure improved scale of operations, efforts at cost reduction, restructuring, changes in the product mix to suit market requirements and ensure better value addition and forward integration have been pursued with vigour. This has neatly complemented the macro-level developments in the industry.

Less of a trump card

The integrated set-up of the Indian textile industry has, over the years, been its major advantage. Garment producers could quite easily source their requirements indigenously, when other countries had to import their requirements. This edge has, however, been wearing thin, with countries such as China and Bangladesh augmenting their spinning and weaving capacities rapidly.

Moreover, the weaving (fabric-making) and processing sector has suffered owing to its fragmented nature and outdated technology . The garment industry may promise low-cost garments thanks to inexpensive labour, but without a strong raw-material chain that can enhance quality, penetrating global markets would be difficult.

The exercise to improve competitiveness is already under way in the spinning segment. The presence of a number of organised players has ensured modernisation of technology and professional practices. Yet, its international competitiveness continues to depend on the differences between global and domestic cotton prices. As India has a large cotton base, spinning companies are able to source cotton at relatively lower prices. But a bad crop, in any year, can quite easily destroy this advantage.

Scaling up margins

Spinning is a low-margin business. On an average, the profit margin of a relatively efficient spinning company is 5-7 per cent in a good year. This is a deterrent for new players. Existing players are trying to enhance their margins by cost cutting, and by focussing on value-added products.

In the past couple of years, a number of companies have pruned cost by focussing on debt restructuring and improving operational efficiencies. Refinancing of high-cost debt and loans from the Textile Upgradation Fund, which offers a 5 per cent interest subsidy on the loans, have helped lower the interest burden.

The cost of power for spinning companies is about 10 per cent of sales; in Pakistan it is about 5 per cent. Companies such as Vardhman Spinning have set up captive plants to reduce power costs. In the South, companies such as Ambika Cotton Mills and Super Spinning have announced plans to set up wind-energy projects to save on fuel costs.

Besides cost cutting, companies are also now positioning their yarn as a value-added product, rather than a commodity. They are focussing on compact spun yarn, gassed mercerised yarn and coarse spun yarn, to name a few (which are less hairy, have higher tenacity, and so on), in a bid to cater to the demands of high-quality fabric-makers. Rajasthan Spinning, one of the bigger players in the blended yarn segments, makes yarn out of such specialty fibres as flame-retardant fibres, which it believes would attract a premium.

Towards integration

There also appears to be another route to better margins. Some players are now foraying into the fabrics and garments businesses, which offer better margins. These segments would provide avenues for growth. The Indian garment sector has, in the past, been allocated lesser quotas vis-à-vis Mexico and Bangladesh. The dismantling of quotas on garments in 2005 is expected to give a boost to the exports of China and India, which are considered to have an edge over other exporting countries.

Players with integrated facilities are perceived to have an edge as they are better placed to control costs and quality. They are also likely to meet stiff deadlines because of shorter lead time. Standalone garment manufacturers may, however, still have an edge over integrated companies because of the flexibility inherent in their operations.

Laying store by garments

Garments is a dynamic business driven by rapidly changing fashion. It often involves catering to a price-sensitive market. A garment producer would also have to be deft at catering to the demands of customers — more so, in the case of exports.

This flexibility would include the ability to switch from producing shirts to trousers, or jeans to khakis at short notice.

The fabric that is required for different garments varies widely. An integrated player may be forced to source a particular type of fabric from elsewhere in order to cater to the needs of the customer. If this situation were to occur repeatedly, it would dilute the advantage of being an integrated player.

Spinning companies that integrate into fabrics and garments may not emerge as leaders in the fabric or garment business. But they may be able to earn a relatively better return on their investment compared to what they would have managed as a stand-alone spinning business. They may also be able to reduce their dependence on commodity cycles, which would lend stability to their revenue and earnings stream.

Weaving, processing — the weak link

While the two ends of the textile chain — spinning and the garment sector — have made headway through cost cutting, capacity expansion and technology upgradation, the weaving and processing sectors have not kept pace. Not surprisingly, these sectors are considered the weak links in the integrated set up of the textile industry. The dominance of unorganised players has stymied the flow of investments in these segments. The foray of large and organised players from the spinning business into these segments augurs well for garment producers.

These companies would bring in fresh investments to the sector where modern technology is largely absent. The share of shuttle-less looms (a superior technology) in India is only 3 per cent against 30 per cent at the global level. This has deprived garment producers of quality fabric.

In this aspect, the Chinese textile industry has an edge. For long, India has been exporting yarn to China, allowing that country to take advantage of its strength in weaving and processing to convert the yarn into value-added productsGoing forward, a greater proportion of supplies would have to be directed to the domestic garment industry. This is essential to raise India's share of apparel exports.

The recent Budget proposal to make Cenvat system (see interview on page 13) optional may provide an incentive to unorganised players to invest in the sector, which would augur well for the industry.

Seeking avenues for growth

Dominant players in fabrics are also on the look out for opportunities for growth. Companies such as Arvind Mills and Raymond are considering leveraging their strengths as fabric-makers in the garments business.

Another avenue that has opened up for those in the fabric and garment business is the home textiles and made-ups (home furnishings, bed-sheets, bath towels) market.

Exports of cotton made-ups have grown at an annual rate of 13.5 per cent between 1997 and 2003, outpacing cotton apparel, which has grown at 9 per cent. Players such as Bombay Dyeing, Welspun India, Abhishek Industries and Alok Industries are ramping up capacities to meet the growing demand in the international market for home textiles.

Once export markets are freed from quantitative restrictions, the demand for fabric would increase. If garment producers do not have access to quality fabric, they may be forced to rely more on imports. This situation may change only if the weaving and processing sectors wake up and spin a winning tale.

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