Industry Risk Score

INDUSIND Bank May 2013

Textile - Cotton Yarn

Introduction
Industry Risk Score (IRS) reflects the impact of industry variables on the cash flow 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 financial 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 flow s, and the degree of variability in cash flow s of the companies. 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 1 2 3 4 5 6 7 8 Risk factors Highly unfavourable Unfavourable Unfavourable Neutral Marginally favourable Favourable Favourable Highly favourable

Contents
Executive summary Background Industry risk parameters Demand-supply Government policies Input-related risk Extent of competition
Financial risk Annexure

3 4 5 5 5 5 6
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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 flow 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 financial performance.

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Disclaimer Last Updated: April 30, 2012

Disclaim er CRISIL Research, a division of CRISIL Limited (CRISIL) has taken due care and caution in preparing this Report based on the information obtained by CRISIL from sources w hich it considers reliable (Data). How ever, CRISIL does not guarantee the accuracy, adequacy or completeness of the Data / Report and is not responsible for any errors or omissions or for the results obtained from the use of Data / Report. This Report is not a recommendation to invest / disinvest in any company covered in the Report. CRISIL especially states that it has no financial liability w hatsoever to the subscribers/ users/ transmitters/ distr ibutors of this Report. CRISIL Research operates independently of, and does not have access to information obtained by CRISILs Ratings Division / CRISIL Risk and Infrastructure Solutions Limited (CRIS), w hich may, in their regular operations, obtain information of a confidential nature. The view s expressed in this Report are that of CRISIL Research and not of CRISILs Ratings Division / CRIS. No part of this Report may be published / reproduced in any form w ithout CRISILs prior w ritten approval.

Executive summary
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 hometextiles 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.

Param eter Textile - Cotton Yarn : Industry risk score Industry characteristics Demand-supply gap Government policy Input-related risk Extent of competition Industry financials Operating margin of industry ROCE of industry Source: CRISIL Research

Weightage

Score 3.81

85.00 25.00 20.00 30.00 25.00 15.00 35.00 65.00

4.05 4.00 7.00 3.00 3.00 2.44 3.80 1.70

TEXTILE - COTTON YARN

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.

Industry risk parameters

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.

TEXTILE - COTTON YARN 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.

Financial Risk
Textile - Cotton Yarn: Financial parameters Select Financial parameters Aggregate turnover Operating profit margin Return on capital employed Net profit margin Return on equity Interest coverage ratio Debt-equity ratio Current ratio Assets turnover ratio Raw materials days WIP holding days Finished goods days Debtors days Creditors days Nos. of companies Source: CRISIL Research Unit Rs million Per cent Per cent Per cent Per cent Times Times Times Times Days Days Days Days Days No Mar-06 42550 16.1 11.3 7.5 16.5 5.7 1.3 4.1 1.1 151 13 27 59 53 13 Mar-07 52161 15.2 8.3 5.1 12 4.4 1.8 3.5 1 141 13 27 53 50 13 Mar-08 57283 13.4 5.8 2 5.2 3.1 2.2 3.8 0.8 129 14 33 53 52 13 Mar-09 58793 9.7 6.2 -0.8 -2.3 1.9 2.3 3.5 0.8 85 11 28 52 44 13 Mar-10 65746 15.3 8.8 4.5 12.3 3.4 2 3.1 0.9 144 13 24 52 42 13 Mar-11 87495 19.4 15.3 9.5 25.6 4.8 1.8 6.7 1.1 156 14 35 47 32 13 Mar-12 87331 6.5 8.7 2.1 5.4 2.4 1.5 5.8 1.1 95 11 22 44 24 13

Textile - Cotton Yarn: Cost aggregates Cost Structure (% of net Sales) Raw material cost Pow er and fuel cost Other operating costs Employee cost Selling cost Nos. of companies Source: CRISIL Research Unit Per cent Per cent Per cent Per cent Per cent No Mar-06 52.7 11.2 6.8 7.6 5.5 13 Mar-07 55 11.3 6.7 7.6 4.2 13 Mar-08 57.6 11.8 5.5 7.8 4.4 13 Mar-09 62.8 11.4 4.6 7.8 3.7 13 Mar-10 58.6 11 4.4 7.7 3.1 13 Mar-11 57.2 9.2 4.5 6.8 2.9 13 Mar-12 70.5 8.8 4.3 7 2.9 13

Annexure
Com panies 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) Net sales Total Operating exp Raw Material exp Purchase of Finished goods Change in stock Salaries and w ages Pow er & Fuel Rent & lease rent Selling & distribution expenses Other expenses OPBDIT Depreciation OPBIT Interest OPBT Other Income Non-op Income Extraordinary Income/Expenses PBT Total Tax Current tax Deferred tax FBT Net profit Nos. of com panies Oct-Dec 2012-13 25641.9 22063 13488.5 654.9 462.5 1889.7 2192.1 0 0 3375.3 3578.9 1208 2370.9 1227 1143.9 149.7 0 4.7 1298.3 520.6 478.1 32.4 0 777.7 14 % of net Sales 100 % 86 % 53 % 3% 2% 7% 9% 0% 0% 13 % 14 % 5% 9% 5% 4% 1% 0% 0% 5% 2% 2% 0% 0% 3% Oct-Dec 2011-12 22707.5 20661.1 12975 721.8 768.9 1650.4 1514.6 0 0 3030.4 2046.4 1175.4 871 1156.4 -285.4 240.9 0 4160.6 4116.1 252 291.8 -39.2 0 3864.1 14 % of net Sales 100 % 91 % 57 % 3% 3% 7% 7% 0% 0% 13 % 9% 5% 4% 5% -1 % 1% 0% 18 % 18 % 1% 1% 0% 0% 17 % Apr-Dec 2012-13 74037 63660.5 40799.2 1461.5 -137.8 5505.8 6230.8 0 0 9801 10376.5 3619.1 6757.4 3837.9 2919.5 589 0 -2 3506.5 1292.3 1158.8 99.1 0 2214.2 14 % of net Sales 100 % 86 % 55 % 2% 0% 7% 8% 0% 0% 13 % 14 % 5% 9% 5% 4% 1% 0% 0% 5% 2% 2% 0% 0% 3% Apr-Dec 2011-12 69692.1 65991.5 43914.5 1853.6 2265.1 4851.8 4613.7 0 0 8492.8 3700.6 3463.2 237.4 3844.8 -3607.4 562.4 0 4866 1821 424.5 505.1 -91.7 0 1396.5 14 % of net Sales 100 % 95 % 63 % 3% 3% 7% 7% 0% 0% 12 % 5% 5% 0% 6% -5 % 1% 0% 7% 3% 1% 1% 0% 0% 2%

Com panies 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., Pr ecot Meridian Ltd., Spentex Industries Ltd.; Super Spinning Mills Ltd.; Vardhman Textiles Ltd.

TEXTILE - COTTON YARN

Textile - Cotton Yarn - Business risk evaluation Risk entity name Business Risk Operating Efficiency Access to Cost Effective Technology Capacity Utilization Availiability of Raw Materials Energy Cost Raw Material Usage Management of Price Volatility Weightages 70 20 25 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
Multi Locational Advantage

25
-

Selling Cost
Employee Cost

Employee Attrition Rate

Vulnerability to event risk

Bargaining pow er with suppliers

Proximity to Customers

Market Position
Brand Equity

30
-

Customisation of Product
Project Management Skills

Size Related Pricing Advantages

Diversified Markets Replacement Markets After Sales Service Proximity to Market Long Term Contracts / Assured Offtake Distribution Setup Financial Ability to Withstand Price Competition Access to Patents Consistency of Quality Product Range Deficit Region Value Addition Consolidation of Markets Support service facilities Other Promotional Ventures Source: CRISIL Research

20 30 20 30 -