The textile sector, which contributes 4% to India’s GDP, is one of the largest sources of employment generation in the country and it accounts for 14% of exports.
This year, factors such as rupee appreciation, higher cotton prices and higher MSP affected the textile industry.
In FY18, the rupee has seen some appreciation. The average USDINR stood at rupees 64.48US$ which is lower by 3.7% compared to rupees 66.97US$ in FY17. This has affected revenues of textile players negatively as for many of them, a major chunk of revenue comes from exports.
Rising cotton prices following the pink bollworm infestation in the cotton crops, has affected margins to major textile players by 150bps this year. During FY18, cotton prices witnessed volatility of ~19% (annualised) and with physical market size of cotton estimated at around Rs68,000cr, the cotton industry faced annualised price risk of over Rs13,000cr. Players like Vardhman Textile Ltd started hedging on Multi Commodity Exchange of India Ltd. (MCX) to cope up with the persistent volatility in cotton prices.
Apart from this, the Union Budget 2018 also announced to increase MSP prices of Kharif crops to 1.5x of cost of production. However, we do not expect any significant impact of the rise in cotton MSP on the textile industry, as current cotton prices are at the same level.