Textile - Cotton Yarn

Executive summary 3

Background 4

Industry risk parameters 5

Demand-supply 5

Government policies 5

Input-related risk 5

Extent of competition 6

Financial risk 6

Annexure 7

Contents

Industry Risk Score (IRS) reflects the impact of industry variables on

the cash f low s and debt repayment ability of the companies in the

industry over 3-4 years. The risk score for an industry is arrived at, by

aggregating the scores assigned to the parameters relevant for the

industry.

Industry parameters include variables such as demand-supply

outlook, cost structures, competition and f inancial performance. The

parameters are selected based on the extent to w hich they affect the

debt-servicing ability of the companies operating in the industry.

Scores on these parameters reflect the extent of positive/negative

impact on cash f low s, and the degree of variability in cash f low s of the

companies.

Industry Risk Score

Introduction

May 2013

Textile - Cotton Yarn

INDUSIND Bank

The industry risk scores have been graded on a eight-point scale, w ith

1 indicating high risk and 8 indicating low risk.

Risk score Risk factors

1 Highly unfavourable

2 Unfavourable

3 Unfavourable

4 Neutral

5 Marginally favourable

6 Favourable

7 Favourable

8 Highly favourable

TEXTILE - COTTON YARN

Industry Risk Scores

Industry Risk Scores (available on 139 industries) capture the influence of industry variables and the extent of

positive/negative impact on the cash f low s and debt repayment ability of companies in an industry over a 3-4 year horizon. The

risk score for an industry is arrived at by aggregating the scores assigned to the relevant parameters like demand supply

outlook, cost structures, competition and f inancial performance.

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1

Executive summary

Parameter Weightage Score

Textile - Cotton Yarn : Industry risk score 3.81

Industry characteristics 85.00 4.05

Demand-supply gap 25.00 4.00

Government policy 20.00 7.00

Input-related risk 30.00 3.00

Extent of competition 25.00 3.00

Industry financials 15.00 2.44

Operating margin of industry 35.00 3.80

ROCE of industry 65.00 1.70

Source: CRISIL Research

After growing by 9 per cent in 2012-13 to 3.56 billion kg driven by sharp 40 per cent increase in exports, CRISIL Research expects cotton yarn demand to grow by 3-4 per cent y-o-y in 2013-14. Though domestic

demand for RMG will improve in 2013-14, the export growth will be lower at close to 5 per cent. Derived demand from exports, however, is expected to be flat on account of subdued demand for RMG and home-textiles in key export markets (US and EU).Spinners are highly susceptible to volatility in cotton prices.

Cotton and cotton yarn prices have seen extreme volatility in the recent past. After having increased by 63 per cent in CS 2010-11, domestic cotton prices declined by 21 per cent in CS 2011-12 to average Rs 101 per kg. Prices in CS 2012-13 are expected to average about Rs 100-105 per kg. In CS 2013-14, we expect

the prices to further increase to about Rs 110 per kg on account of declining production as farmers shift towards more remunerative crops coupled with an improvement in demand from yarn manufacturers.In order to mitigate the risk of exposure to a highly commoditised market, established cotton yarn spinners

have forward integrated into manufacturing fabric and home textiles. However, this has resulted in highly leveraged balance sheets, increasing the financial risk of manufacturers. Also, some players altered their

raw material mix by using more of polyester on account of high cotton prices.

2


Background

The spinning industry is fragmented with 1,769 spinning mills, 198 composite mills and 1,350 small -scale spinning units. Spun yarn capacities are concentrated in Tamil Nadu, Maharashtra, Gujarat, Andhra Pradesh and Punjab. These states account for 75 per cent of the total spinning capacity in India. The largest

capacities are in Tamil Nadu, accounting for 46 per cent of the total capacities in India. Besides, no single player has an influence on prices given the highly commoditised nature of the industry. Being a seasonal commodity, cotton is procured in the CS (October-September). The peak period for cotton arrivals is

between November and February; most companies make their cotton purchases during these months. Therefore, cotton prices across two cotton seasons will influence material costs of spinning companies in a financial year (April-March); for instance, cotton prices during CS 2011-12 and CS 2012-13 will influence

cotton costs of spinning companies for 2012-13.

3

Industry risk parameters Score 3.3

Demand - Supply

Demand for cotton yarn grew strongly by around 9 per cent y-o-y to around 3.56 billion kg in 2012-13 on

account of strong growth in direct yarn exports. Yarn exports, which contributed about 30 per cent to the

overall demand in 2012-13, grew by 40 per cent y-o-y in 2012-13 mainly on account of a strong demand from

China. Domestic demand, which is the largest segment of the cotton yarn demand(comprise 50 per cent in

2012-13) grew by 3.5 per cent y-o-y in 2012-13 after a decline in 2011-12 as RMG volumes in the domestic

market recovered in 2012-13. Derived demand from exports, however, is estimated to have declined by

around 8 per cent y-o-y in 2012-13. As the economic slowdown in the major markets (US and EU) in 2012

affected the demand for garments and made-ups, India's export volumes of RMG and home-textiles declined

sharply in the same period.The overall demand for cotton yarn is expected to grow by 3-4 per cent y-o-y in

2013-14. This growth will mainly be driven by domestic demand. As the RMG volumes in the domestic market

are expected to grow by 3-4 per cent in 2013-14. Direct yarn exports are expected to grow further by around 5

per cent y-o-y in 2013-14 as China is expected to maintain its level of imports from India, owing to high price

of cotton prices in that country. Turkey is expected to increase its off-take from India after removal of

safeguard duty on Indian yarn. However, derived demand from exports will be flat in 2013-14 as India's RMG

and home-textile exports are expected to be subdued.

Government policies

The government policies have been largely supportive of the growth in the textiles industry, given its potential

for employment generation. Schemes like Technology Upgradation Fund Scheme (TUFS) have singnificantly

reduced capital costs for the industry. The government has decided to continue with TUFS for 12th 5-Year

Plan in budget 2013. It has also allocated a sum of Rs 24 bn for 2013-14. Also, the announcement of removal

of 3.6 per cent excise duty from readymade garments is expected to be beneficial to the industry.Some of the

state governments (Gujarat, Maharshtra, MP etc.) have come up with their own textile policies in which they

have offered an array of benefits to the textile industry. These benefits outweigh the benefits given by the

central government to the industry. Gujarat governemnt plans to provide an interest subsidy of 5 per cent

above TUFS coupled with a power subsidy of Re 1 per unit. Maharshtra government's interest subsidy is

linked with TUFS wherein the effective interest rate for spinning becomes zero. We believe that some of these

state policies will be the main driver of capacity expansions going forward.

Input - related risk

Cotton is the main raw material, accounting for around 60 per cent of net sales. Cotton prices have seen

increased volatility in the past 2-3 cotton seasons (CS-October to September). After having increased by 63

per cent in CS 2010-11, domestic cotton prices (Shankar-6 variety) declined by 21 per cent in CS 2011-12 to

average Rs 101 per kg. Prices are expected to average in Rs 100-105 per kg in CS 2012-13.We expect the

prices to further increase and average around Rs. 110 per kg. This increase will be driven by declining

production as farmers shift towards more remunerative crops (such as soyabean) coupled with a further

improvement in demand from yarn manufacturers.

4


Financial Risk

Textile - Cotton Yarn: Financial parameters

Select Financial parameters Unit Mar-06 Mar-07 Mar-08 Mar-09 Mar-10 Mar-11 Mar-12

Aggregate turnover Rs million 42550 52161 57283 58793 65746 87495 87331

Operating profit margin Per cent 16.1 15.2 13.4 9.7 15.3 19.4 6.5

Return on capital employed Per cent 11.3 8.3 5.8 6.2 8.8 15.3 8.7

Net profit margin Per cent 7.5 5.1 2 -0.8 4.5 9.5 2.1

Return on equity Per cent 16.5 12 5.2 -2.3 12.3 25.6 5.4

Interest coverage ratio Times 5.7 4.4 3.1 1.9 3.4 4.8 2.4

Debt-equity ratio Times 1.3 1.8 2.2 2.3 2 1.8 1.5

Current ratio Times 4.1 3.5 3.8 3.5 3.1 6.7 5.8

Assets turnover ratio Times 1.1 1 0.8 0.8 0.9 1.1 1.1

Raw materials days Days 151 141 129 85 144 156 95

WIP holding days Days 13 13 14 11 13 14 11

Finished goods days Days 27 27 33 28 24 35 22

Debtors days Days 59 53 53 52 52 47 44

Creditors days Days 53 50 52 44 42 32 24

Nos. of companies No 13 13 13 13 13 13 13


Textile - Cotton Yarn: Cost aggregates

Cost Structure (% of net Sales) Unit Mar-06 Mar-07 Mar-08 Mar-09 Mar-10 Mar-11 Mar-12

Raw material cost Per cent 52.7 55 57.6 62.8 58.6 57.2 70.5

Pow er and fuel cost Per cent 11.2 11.3 11.8 11.4 11 9.2 8.8

Other operating costs Per cent 6.8 6.7 5.5 4.6 4.4 4.5 4.3

Employee cost Per cent 7.6 7.6 7.8 7.8 7.7 6.8 7

Selling cost Per cent 5.5 4.2 4.4 3.7 3.1 2.9 2.9

Nos. of companies No 13 13 13 13 13 13 13


Extent of Competition

The spinning industry is fragmented with 1,769 spinning mills, 198 composite mills and 1,350 small -scale

spinning units. The cotton yarn industry is highly commoditised. As a result, no single player can influence

prices. The high degree of fragmentation and commoditised nature has caused intense competition among

spinning companies.

5

Annexure

Companies used for calculating sector aggregates

Ambika Cotton Mills Ltd.,Bannari Amman Spinning Mills Ltd.,Cheslind Textiles Ltd.,D C M Ltd.,G T N Industries Ltd.,G T N Textiles Ltd.,Kandagiri Spinning Mills Ltd.,Maharaja Shree Umaid Mills Ltd.,Malw a Cotton Spg. Mills Ltd.,Precot Meridian Ltd.,Spentex Industries Ltd.,Super Spinning Mills Ltd.,Vardhman Textiles Ltd.

The above companies constitute 2 per cent of the turnover of the industry.

Textile - Cotton Yarn - Sector Aggregate - Interim results

(Figures in Rs Million) Oct-Dec

2012-13

% of

net

Sales

Oct-Dec

2011-12

% of

net

Sales

Apr-Dec

2012-13

% of

net

Sales

Apr-Dec

2011-12

% of

net

Sales

Net sales 25641.9 100 % 22707.5 100 % 74037 100 % 69692.1 100 %

Total Operating exp 22063 86 % 20661.1 91 % 63660.5 86 % 65991.5 95 %

Raw Material exp 13488.5 53 % 12975 57 % 40799.2 55 % 43914.5 63 %

Purchase of Finished goods 654.9 3 % 721.8 3 % 1461.5 2 % 1853.6 3 %

Change in stock 462.5 2 % 768.9 3 % -137.8 0 % 2265.1 3 %

Salaries and w ages 1889.7 7 % 1650.4 7 % 5505.8 7 % 4851.8 7 %

Pow er & Fuel 2192.1 9 % 1514.6 7 % 6230.8 8 % 4613.7 7 %

Rent & lease rent 0 0 % 0 0 % 0 0 % 0 0 %

Selling & distribution expenses 0 0 % 0 0 % 0 0 % 0 0 %

Other expenses 3375.3 13 % 3030.4 13 % 9801 13 % 8492.8 12 %

OPBDIT 3578.9 14 % 2046.4 9 % 10376.5 14 % 3700.6 5 %

Depreciation 1208 5 % 1175.4 5 % 3619.1 5 % 3463.2 5 %

OPBIT 2370.9 9 % 871 4 % 6757.4 9 % 237.4 0 %

Interest 1227 5 % 1156.4 5 % 3837.9 5 % 3844.8 6 %

OPBT 1143.9 4 % -285.4 -1 % 2919.5 4 % -3607.4 -5 %

Other Income 149.7 1 % 240.9 1 % 589 1 % 562.4 1 %

Non-op Income 0 0 % 0 0 % 0 0 % 0 0 %

Extraordinary Income/Expenses 4.7 0 % 4160.6 18 % -2 0 % 4866 7 %

PBT 1298.3 5 % 4116.1 18 % 3506.5 5 % 1821 3 %

Total Tax 520.6 2 % 252 1 % 1292.3 2 % 424.5 1 %

Current tax 478.1 2 % 291.8 1 % 1158.8 2 % 505.1 1 %

Deferred tax 32.4 0 % -39.2 0 % 99.1 0 % -91.7 0 %

FBT 0 0 % 0 0 % 0 0 % 0 0 %

Net profit 777.7 3 % 3864.1 17 % 2214.2 3 % 1396.5 2 %

Nos. of companies 14 14 14 14

Companies included in interim sector aggregate Ambika Cotton Mills Ltd.; Bannari Amman Spinning Mills Ltd.; Cheslind Textiles Ltd.; D C M Ltd.; G T N Industries Ltd.; G T N Textiles

Ltd.; Kandagiri Spinning Mills Ltd.; Maharaja Shree Umaid Mills Ltd.; Malw a Cotton Spg. Mills Ltd.; Maral Overseas Ltd., Precot Meridian Ltd., Spentex Industries Ltd.; Super Spinning Mills Ltd.; Vardhman Textiles Ltd.

6


Textile - Cotton Yarn - Business risk evaluation

Risk entity name Weightages

Business Risk -

Operating Efficiency 70

Access to Cost Effective Technology -

Capacity Utilization 20

Availiability of Raw Materials 25

Energy Cost -

Raw Material Usage -

Management of Price Volatility 30

Product Design and Development -

Adherence to Environmental Regulation -

R & D Activities -

FCA / MDA Approved Plants -

Efficiency of Benefication Process -

Availability of Skilled Labourers -

Hygenic Processing Facility -

Indigenisation Level -

Integration of Operations 25

Multi Locational Advantage -

Selling Cost -

Employee Cost -

Employee Attrition Rate -

Vulnerability to event risk -

Bargaining pow er with suppliers -

Proximity to Customers -

Market Position 30

Brand Equity -

Customisation of Product -

Project Management Skills -

Size Related Pricing Advantages -

Diversif ied Markets 20

Replacement Markets -

After Sales Service -

Proximity to Market -

Long Term Contracts / Assured Offtake 30

Distribution Setup -

Financial Ability to Withstand Price Competition 20

Access to Patents -

Consistency of Quality 30

Product Range -

Deficit Region -

Value Addition -

Consolidation of Markets -

Support service facilities -

Other Promotional Ventures -


Documents

Textile - Cotton Yarn