Operating profitability¹ of home textile makers is seen moderating 150-200 basis points (bps) to ~13% this fiscal (refer to Annexure 1), hemmed in by lower export demand and a sharp increase in raw material and transportation costs.

Yet, credit outlook for the sector will remain stable. Balance sheets, strengthened by healthy cash accrual and debt reduction over the past two fiscals, will lend support, a Crisil Ratings analysis of 60 companies that account for over 60% of the sector revenue, shows.

Exports account for 60-70% of the Indian home textile industry’s revenue. The US, the world’s largest market for it, accounts for a sizeable ~58% of these exports.

Global demand for home textiles is expected to be impacted in the near-term by inflationary headwinds, with big-box retailers pruning inventory and consumers cutting down on discretionary spends. A slowdown in the sales of key US retailers in the past 3-6 months has led to an on-year decline of 5-6% in overall home textile exports from India (refer to Annexure 2) between January and April 2022.

Adding to the demand challenge is the price of raw cotton, a key input in home textiles. Its price has more than doubled on-year in May to ~Rs 100,000 per candy². This will remain a challenge for exporters till the new cotton crop arrives starting October. Supply-chain disruptions leading to volatility in ocean freight rates will also impact profitability. With domestic cotton prices soaring past international levels, exports have become less competitive. Consequently, India’s share in the US import basket moderated 700 bps in the four months ended April 2022, on-year.

Says Mohit Makhija, Senior Director, Crisil Ratings, “Slowing exports growth and high cotton prices will hit the operating margins of home textile exporters by 150-200 bps this fiscal. The rupee’s depreciation against the dollar and sustenance of the China+1 policy by global buyers will cushion the hit on profitability to some extent. The second half of this fiscal should gradually restore demand momentum and market share for Indian home textile exporters as freight and raw cotton costs moderate, and ease pressure on profitability.”

Overall, Indian home textile industry’s revenue is expected to grow 11-12% this fiscal, primarily because of higher in price realisations. Domestic demand (comprising 30-40% of Indian home textile industry’s revenue) is expected to grow at a healthy 13%, driven by sharp demand recovery in the domestic hospitality industry and continued focus on health and hygiene. Growth in export demand will moderate to 10% from 25% last fiscal due to slower recovery in the international travel and hospitality segments globally.

Capex spends would be pruned this fiscal as current capacity utilisation levels of ~75% affords sufficient headroom to accommodate any increase in demand.

Says Gautam Shahi, Director, Crisil Ratings, “Strengthening of balance sheets over past two fiscals and steady cash generation will keep debt metrics stable this fiscal. The interest coverage³ ratio of Crisil-rated home textile companies will remain at 6-6.5 times and gearing3 at 0.7-0.8 time this fiscal, compared with 6.2 times and 0.8 time, respectively, last fiscal.”

That said, input prices in the new cotton season, resolution of supply-chain issues and global inflationary pressure will bear watching over the medium term.

¹ Operating profitability refers to EBIDTA (Earnings before interest, tax, depreciation and amortization) margin
² 1 candy equals 356 Kgs in weight
³ Interest Coverage = EBIDTA Divide By Interest and Finance Charges; Gearing =Debt Divide By Networth