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ICRA

Industry Comment The Indian Manmade Fibres Industry

ICRA Sector Analysis


MANMADE FIBRES

ICR
The Indian Manmade Fibres Industry
September 2005

Industry Comment

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Industry Comment The Indian Manmade Fibres Industry

Contacts:
Yogesh Malhotra Manager
Amul Gogna Executive Director &
Chief of Information and Grading Service
Date September 2005

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Industry Comment The Indian Manmade Fibres Industry

T ABLE O F C ONTENTS
Porter's Model.......................................................................................................................................................................4

Structure of the Industry..................................................................................................................................................5

Key issues facing the players .................................................................................................................................... 13

Global Cyclicality ............................................................................................................................................................ 13


Raw Material .................................................................................................................................................................... 16
High Fibre Intermediate Prices over short to medium term............................................................................. 18
Conversion Margins over Raw Material.................................................................................................................. 20
Indias Textile Exports Post 2005 ..............................................................................................................................21

Trends in Production, Consumption, Price, Capacity Utilisation ..............................................................25

Demand Supply position............................................................................................................................................... 28

New Projects .................................................................................................................................................................... 30


Overall Demand Supply ............................................................................................................................................... 31

Review of Performance ................................................................................................................................................. 31

Polyester Players............................................................................................................................................................ 31
Acrylic Players ................................................................................................................................................................. 34
Nylon Players ...................................................................................................................................................................35
Viscose Players............................................................................................................................................................... 37

Critical Success Factors ............................................................................................................................................... 38

Enhancement of Capacities ........................................................................................................................................ 38


Current Facility Management..................................................................................................................................... 40

Outlook .................................................................................................................................................................................. 41

Annexure 1. Policy Reforms in the Indian Textile Industry.......................................................................... 43

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Industry Comment The Indian Manmade Fibres Industry

PO R T E R ' S M O D E L

Threat of Substitutes:
Medi um Polyester has better
properties in comparison to cost
than other synthetic fibres.
Against cotton, while it is more
stronger and durable, it lacks
comfort. Worldwide, it is
substituting cotton and other
fibres on account of its low and
reducing cost.

Bargaining Power of Suppliers: Inter-Firm Rivalry Bargaining Power of Buyers:


Medium Medium Rivalry is cyclical in Small
nature. It is currently medium as
Degree of fragmentation lower in Buyers are mostly small scale
the manmade fibre industry is in
suppliers. Margins currently high and extremely large in number
moderate over-capacity. Apart
for the fibre intermediates (more than 1 million powerloom
from prices, players compete on
units exist in the country).
quality of product, credit terms,
and technological support
provided to the buyer
(processor).

Barriers to entry: Medium to


High
The capital costs are large.
The gestation period is long.
Developing a customer base
takes a long time.

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Industry Comment The Indian Manmade Fibres Industry

ST R U C T U R E OF THE INDUSTRY

In the cotton dominated Indian textile industry, manmade fibres account for an around 48% share as
against 58% globally. However, in 2004-05, with large volumes of cotton being exported in various
forms of textiles and apparel (accounting for more than 40% of the domestic cotton production), the
share of manmade fibres in the domestic finished textiles market stood at around 60%.

The textiles industry in India, employing around 35 million people, accounts for around 20% of the
countrys total industrial production and 15% of its total exports. The economic liberalisation process,
initiated in 1991, has seen Indian textile manufacturers shifting from traditional exports of raw cotton,
to export of yarn, fabric and garments, with increasing emphasis on value-addition. The industry is the
largest net exports earner with annual export revenues of over Rs. 600 billion (15% of countrys
exports) and contributing almost Rs. 50 billion to excise collections (over 10% of the countrys total
excise revenue).

Currently, the Indian textile industry accounts for 8.0% of the global textile fibre (including cotton)
production. India is the fourth largest manmade fibre producer globally, after China, Taiwan and the
US. At present, the global production figure for manmade fibres is around 38.0 million tonnes, while
the Indian figure is around 2.2 million tonnes. Thus, Indias share of the world manmade fibres
production is lower at around 5.7%.

A textile fibre needs to be converted into yarn and fabrics. Also, it must be capable of being dyed in various
shades and patterns (aesthetics). The most commonly used fibres are compared on various important
parameters in the following table.

Comparison of Different Fibres on Key Parameters

Natural Cellulosic Synthetics


Cotton Viscose Polyester Acrylic Nylon
Comfort Factors
Moisture Absorbency High High Low Low Low
Resistance to Excellent Excellent Poor Medium Poor
Electrostatic Charges
Dyeability
Affinity for dyes High High Low Low Low
Print Brightness
Initial Poor Excellent Excellent Excellent Excellent
Soap Resistance Poor Poor Excellent Excellent Poor
Exposure to Sunlight Poor Poor Excellent Excellent Poor
Wear
Performance
Wrinkle Resistance Very Poor Poor Excellent Excellent Good
Crease Recovery Poor Poor Excellent Excellent Good
Drape Average Average Excellent Excellent Good
Durability
Tensile Strength Medium Medium High Medium High
Abrasion Strength Medium Medium High Medium High
Compiled by INGRES

Polyester filament yarn (PFY) is by far the most popular synthetic fibre/yarn in India (for the
production/consumption trends in different fibres, refer following section). Till the late 1990s, the
production of PFY displayed a faster growth rate of 19% per year. The growth rate for polyester staple
fibre (PSF)used for blending with cotton and viscose yamwas 18% over the same period.
However, in the recent past, the consumption of PFY and PSF has slowed down significantly. While

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Industry Comment The Indian Manmade Fibres Industry

the growth rate of PFY was 7.1% between 2000-01 and 2004-05, PSF consumption reported only
2.8% growth during the same period.

The share of manmade fibres in Indias total textile fibre consumption and the past trends in the
consumption of manmade fibres are depicted in the following figure.

Increasing Share of Manmade Fibres in Indias Fibre Production

90.0

80.0

70.0

60.0

50.0
%

40.0

30.0

20.0

10.0

0.0
1994-95 1995-96 1996-97 1997-98 1998-99 1999- 2000-01 2001-02 2002-03 2003-04
2000

MMF Polyester Polyester/MMF

Compiled by INGRES

The Indian manmade fibre industry consists of two main sets of players: one, who are erstwhile textile
players, and two, who have a presence only in manmade fibres (that is, non-diversified players).
Further, there are some companies that have been established by equity contribution from the
technology licensors. The Indian petrochemical companies have a presence mainly in the fibre
intermediates segment of the fibre value chain (excluding Reliance Industries Limited, or RIL, which
can be considered as a former textile player).

The industry structure for most manmade fibres is pyramidal, with a small number of players having a
large capacity-share and vice-versa (refer following figure). As expected, only the large players have
been able to withstand the low international margins and the over-capacity scenario characterising the
manmade fibres industry during the late 1990s.

Variations in Plant Size in the Indian PFY


Industry Variations in Capacity in Indian PSF
Industry
30
7
25
6

20 5

4
15

3
10
2
5
1

0 0
>2,00,000 70,000- 30,000-70,000 <30,000 >2,00,000 2,00,000 - 25,000 - <25,000
2,00,000 50,000 50,000

Capacity (tpa) Capacity (tpa)

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Industry Comment The Indian Manmade Fibres Industry

In all synthetic fibres, the plant capacities of Indian players (except Reliance Industries Limited or RIL,
and Indo Rama Synthetics Limited or IRSL; Grasim Industries Limited in viscose fibres; and SRF
Limited in Nylon) are significantly lower than those of their international counterparts (refer following
figures). Since the global plants are larger, their higher economies of scale and dominant shares of
the world market have allowed them o t achieve higher profitability even when industry margins are
low.

Comparison of Indian Capacity Sizes with Global Levels - PFY

180
160
140
120
'000 tonnes

100
80
60
40
20
0
West United Japan South Taiwan China India India*
Europe States Korea

Comparison of Indian PSF Capacities with Global Levels

250

200
' 000 tonnes

150

100

50

0
West United Japan South Taiwan China India
Europe States Korea

Page 7 of 45
Industry Comment The Indian Manmade Fibres Industry

Comparison of Average Indian Plant Capacities


with Major World Producing Countries: ASF

120

100

80

60

40

20

0
Western USA Japan South Taiwan China India
Europe Korea

Comparison of Average Indian Plant Capacities


with Major World Producing Countries: Nylon 66

80

70

60

50

40

30

20

10

0
Western USA Japan South Taiwan China India India
Europe Korea NFY NITY

* - excluding players with plant sizes less than 8000 tpa


Compiled by INGRES

Most of the manmade fibre manufacturers in the Indian industry are not integrated with the production
of fibre intermediates. However, the few players who have facilities to produce fibre intermediates also
have large capacities (except in the case of acrylonitrile and rayon grade wood pulp). Further, the raw
material industry unlike the downstream fibres industryis highly concentrated.

In the polyester industry, only RIL and Bongaigaon Refinery and Petrochemicals Limited (BRPL) are
integrated backwards into the production of purified terephthalic acid (PTA)/di methyl terephthalate
(DMT) and mono ethylene glycol (MEG) ( RIL manufactures PTA, and BRPL produces DMT) while
the other players depend on other companies or import their requirement of intermediates. Indian
Petrochemicals Corporation Limited (IPCL) and Bombay Dyeing & Manufacturing Limited (BDML)
have a presence in the polyester intermediate, DMT.

In other fibres, the level of integration with raw materials is similar. In nylon, only Gujarat State
Fertilisers Corporation (GSFC), which has a small share in nylon production, has captive caprolactam
facilities. Similarly, in acrylic fibres, only IPCL produces acrylonitrile in-house while the rest depend on

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Industry Comment The Indian Manmade Fibres Industry

imports for the intermediate. However, in viscose staple fibre, both the players, namely Grasim
Industries Limited (Grasim) and SIV Industries Limited (SIV) are partly integrated into the production
of rayon grade wood pulp.

RIL, in sharp contrast, has a larger share in polyester intermediates than in polyester. RIL is the most
integrated polyester manufacturer in the worldfrom reformate (raw material for paraxylene)
production to polyesterwhich places it among the least-cost producer of polyester fibres
globally. During the year, Reliance invested in Trevira, a leading producer of branded polyester fibres
in Europe.
Trevira has a manufacturing capacity of 130,000 tonnes per annum of polyester staple fibres. With the
acquisition, RIL has become the worlds largest producer of polyester fibre and yarn.

The market shares of various players in various stages of the polyester chain are presented in the
following flowchart.

Page 9 of 45
Industry Comment The Indian Manmade Fibres Industry

PFY Manufacturers Share


Major Players at Different Stages in the Polyester Value Chain (%)
Reliance Industries Limited* 27.9%
Indo Rama Synthetics (I) 11.8%
Limited
Gar den Silk Mills Limited 6.8%
MEG Manufacturers (share in %) Century Enka Limited 5.7%
J.B.F. Industries Limited 5.4%
Reliance Industries Limited (64.7%) Recron Synthetics Limited* 4.7%
Indian Petrochemicals Corporation Limited* Sanghi Polyester Limited 3.9%
(24.5%) Modern Petrofils Limited 3.8%
Nova Petrochemicals Limited 2.6%
SM Dyechem* (7.2%) Central India Polyesters 2.3%
India Glycols Limited (3.6%) Limited*
Orkay Industries Limited 2.1%
Jindal Polyester Limited 2.0%
Prag Bosimi Synthetics 1.8%
Mono Ethylene Glycol Limited
Ethylene Apollo Fibres Limited* 1.7%
Parasrampuria Synthetics 1.6%
Limited
Welspun Syntex Limited 1.6%
Other Small Players 14.4%

Paraxylene PTA/DMT
Reformate PET Chips

PX Manufacturers (share in %) PTA /DMT Manufacturers (share in %) PSF Manufacturers Share (%)
BRPL (1.7%) BRPL (2.1%) Reliance Industries Limited 39.4%
Reliance Industries Limited (95.5%) Reliance Industries Limited (60.2%) Indo Rama Synthetics (I) Limited 19.0%
Indian Petrochemicals Corporation Limited* Indian Petrochemicals Corporation Limited* Appollo Fibres Limited* 7.9%
(2.8%) (1.4%)
Bombay Dyeing and Manufacturing Co. Orissa Synthetics Limited * 5.0%
Limited (7.8%) Futura Polyesters Limited 5.5%
MCC PTA India Private Limited (20.0%) BRPL 4.3%
SVC Superchem Limited (5.6%) Terene Fibres India Limited * 4.3%
Garware Polyester Limited (2.8%) India Polyfibres Limited 5.7%
Swadeshi Polytex Limited 2.0%
Viral Filaments 1.9%
J K Synthetics Limited 1.9%
Ahmedabad Mfg. and Calico Ptg. 1.1%
Co. Ltd
Garware Petrochem Limited 1.0%
Arora Fibres Limited 0.9%

* - Companies owned by RIL


Page 10 of 45
Industry Comment The Indian Manmade Fibres Industry

In India, only the small players with insignificant capacities have a presence in diverse types of
fibres. These players are also financially unprofitable.

During the second half of the 1990s, a downturn in the global polyester markets, over-capacity
in the domestic market, and the entry of very large integrated players not only turned the small
players sick, but also hurt the medium capacity players who reported poor financial
performance. The stock prices of these middle-capacity players took a severe beating, making
them good targets for acquisition by the financially strong players. Thus, market leader
Reliance Industries Limited (RIL) acquired various medium-capacity players in the Indian
polyester filament yarn (PFY) industry, like Raymond Synthetics, ICI and DCL Polyester, during
this period.

During 2002, the twin factors of low fibre intermediate prices and high cotton prices in the
international markets increased the margins of the fibre producers significantly. While the
medium capacity players improved their financial performance significantly and were profitable
once again, and continued high profitability allowed net worth of some of the players (which had
become negative earlier) to turn positive. However, in FY2005, declining cotton prices, high
fibre intermediate prices and worsening international demand supply situation has resulted in
significant decline in margins. The increasing over-capacity in global markets and nearby China
further exacerbated the situation.

In substitutes, cotton is the most important in the Indian textile industry, accounting for around
52% of the domestic fibre/yarn consumption. Cotton yarn constitutes more than 70% of the total
spun yarn produced in the country. Increasing exports of cotton and cotton-based textiles have
allowed the polyester industry make inroads into the domestic textiles market.

The Indian weaving and garment manufacturing industry is dominated by the decentralised
small-scale industry (SSI), because of the historical tilt of Government policies towards it. In
effect, this SSI-tilt, till recently, prompted several vertically integrated composite mills to opt out
of the industry. The non-applicability of strict labour laws to SSIs, the lower excise duties levied
on them, and the reservation of garment manufacture for small units are some of the policy
measures that hitherto deterred the development of the corporate sector in this industry.
Notably, however, the direction of Government policy has changed since November 2000 and
the Government has announced several fiscal measures aimed at increasing productivity in the
sector (refer Annexure 1 for policy reforms in the Indian Textile industry).

The fabric manufacturing industry consists of composite mills, powerlooms, handloom and
hosiery/knitting units. Powerlooms have a significantly large presence in the manmade fabrics
1
sector, as the hank yarn obligation does not obstruct the flow of manmade yarn to power-looms.

1
which requires spinning units to either process about a quarter of their deliveries in the form of a yarn used by
handlooms or to transfer the obligation to other firms

Report by ICRA Information, Grading & Research Service Page 11 of 45


Industry Comment The Indian Manmade Fibres Industry

Segment -wise Production of Fabrics in India

Cotton 100% Manmade

Mill
Handloom
Mill 2%
6%
6% Hosiery
Powerloom
3%
Hosiery 33%
28%

Powerloom
89%

Handloom
33%

Blended/Mixed Total Fabrics

Mill Mill
Hosiery 5% Hosiery 4%
13% 17%
Handloom
2%

Powerloom
Handloom 60%
19%
Powerloom
80%

Compiled by INGRES

As of March 2004, the country had 1.84 million power-looms with a valid permit, of which 45%
were in Maharashtra, 17% in Gujarat and 18% in Tamil Nadu. The size of a typical power-loom
unit in India is small (<75 looms) and it consumes mainly grey yarn (dyed yarn is also used, but
in limited quantities).

The small-scale nature of the various units in the Indian weaving sector has prevented them from
making large investments in modernising their looms. As depicted in the following graph, the
share of shuttle-less looms in the Indian textiles industry, which accounts for over 9% of the
looms installed worldwide, is only 3% as against a share of 30% worldwide, thereby indicating a
low degree of modernisation in the Indian weaving industry. The small-scale sector, which is the
predominant sector in the Indian weaving industry, can invest limited funds in modernisation, and
thus, the Indian weaving sector has remained as one using antiquated machinery.

Report by ICRA Information, Grading & Research Service Page 12 of 45


Industry Comment The Indian Manmade Fibres Industry

Degree of Modernisation

90
% of shuttleless looms of the total

76.8
80
67
70
60.8
60

50

40
30.2 29.3
30 23.2
17.4 17.7
20 11.9
10 6.2
3.7

0
India (9.3) World Africa Mexico North South China Indonesia Pakistan Asia (65.1) Europe
(4.9) (2.2) America America (33.0) (10.2) (1.0) (15.5)
(6.0) (9.8)

Figures in brackets indicate share of country in the world loomage capacity


Compiled by INGRES

KEY ISSUES FACING THE PLAYERS

Global Cyclicality

Globally, the manmade fibres industry exhibits considerable cyclicality. Typically, significant
capacity additions are initiated in the high-profitability phase, which, when implemented after
the gestation, cause oversupply. This pulls down profitability and a period of slump ensues.

Overall, the demand for manmade fibres has risen significantly during the last decade with
cotton being increasingly substituted and the developed economies and Asia reporting
economic growth (barring 1997-1998, when the East Asian currency crisis occurred). Among
manmade fibres, the fastest growth has taken place in polyester, while the demand for
cellulosics which had declined earlier, is now showing an increasing trend.

The demand for manmade fibre slowed down between 1997 and 1999, mainly on account of
the East Asian crisis. The large amount of capacity additions (during the mid- and late-1990s)
exacerbated the decline in operating rates. The financial and currency crises not only in East
Asia, but also in Russia and Latin America, had a heavier impact on the manmade fibre
markets in 1998 than initially expected.

Most of the capacity additions in Asia during the mid-1990s were prompted by the fast rising
demand in China. However, China itself built up large capacities during the late 1990s, thus
exacerbating the oversupply situation.

Slow capacity additions post-1999 and the recovery in demand for manmade fibres in 2002
resulted in an increase in operating rates and margins. The world cotton output declined by
11% during 2002 as production dropped in most of the leading producing countries. The
decline in cotton output led to an increase in cotton prices and in the demand for manmade
fibres. Overall, despite the slowdown in leading developed economies and the unfavourable
geo-political environment, textile demand showed an increase of 4.1% in 2002 over the 2001
level. Almost all the manmade fibres reported an increase in consumption in 2002, with
polyester showing the maximum volume growth. While PFY demand reported an increase of
8.0%, PSF demand increased by 5.9%, thus lifting the global operating rates significantly.

Report by ICRA Information, Grading & Research Service Page 13 of 45


Industry Comment The Indian Manmade Fibres Industry

World NFY Consumption Trends and Operating World ASF Consumption Trends and Operating
Rates Rates

6.0 78.0 4.0 90.0

76.0 3.5
5.0
74.0 85.0
3.0
72.0
4.0
2.5
70.0 80.0

3.0 68.0 2.0

66.0 75.0
1.5
2.0
64.0
1.0
62.0 70.0
1.0
0.5
60.0

0.0 58.0 0.0 65.0


1994 1996 1998 2000 2002 2004 1994 1996 1998 2000 2002 2004

Capacity Consumption Operating Rate Capacity Consumption Operating Rate

World PSF Consumption Trends and Operating World PFY Consumption Trends and Operating
Rates Rates

16.0 81.0 25.0 86.0

84.0
14.0 79.0
82.0
20.0
12.0 77.0 80.0

78.0
10.0 75.0
15.0
76.0
8.0 73.0
74.0
10.0
6.0 71.0 72.0

70.0
4.0 69.0
5.0 68.0
2.0 67.0
66.0

0.0 65.0 0.0 64.0


1994 1996 1998 2000 2002 2004 1994 1996 1998 2000 2002 2004

Capacity Consumption Operating Rate Capacity Consumption Operating Rate

World Cellulosic Fibre Consumption Trends


and Operating Rates

3.0 130.0

120.0
2.5

110.0
2.0

100.0
1.5
90.0

1.0
80.0

0.5
70.0

0.0 60.0
1994 1996 1998 2000 2002 2004

Capacity Consumption Operating Rate

However, following the mini peak in 2002, significant capacities have been added mainly in
China, which has resulted in decline in operating rates in the Chinese and global market. Even

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Industry Comment The Indian Manmade Fibres Industry

though the demand growth has been strong during 2001-2004, with the PSF and PFY demand
increasing at a rate of 7.0% and 8.3% respectively, the capacity additions have been
significantly higher resulting in decline in operating rates. During 2004 alone, 3.5 million tonnes
of polyester capacity were added. The current operating rates in China are low at around 60%.
The global operating rates are also low currently and during 2004, the global polyester industry
witnessed low profitability.

The following table highlights the continuation of trend of shifting of polyester production to
Asia. During 2003, the Asian region accounted for 84% of global capacity with China
accounting for nearly half of the Asian capacity.

Rising Share of Asia in Polyester Production


000 1999 2000 2001 2002 2003
tonnes
Filament Staple Total Filament Staple Total Filament Staple Total Filament Staple Total Filament Staple Total
Japan 387 278 665 382 282 664 364 264 628 323 241 564 295 233 528
China 2,743 1,696 4,439 3,172 2,069 5,241 3,892 2,396 6,288 4,755 2,941 7,696 5,642 3,491 9,133
S. 1,406 741 2,147 1,484 731 2,215 1,437 674 2,111 1,423 603 2,026 1,400 601 2,001
Korea
Taiwan 1,584 939 2,523 1,632 938 2,570 1,584 838 2,422 1,603 890 2,493 1,555 878 2,433
Other 2,126 1,923 4,049 2,322 2,014 4,336 2,374 2,065 4,439 2,430 2,110 4,540 2,487 2,163 4,650
Asia
Asian 8246 5577 13823 8992 6034 15026 9651 6237 15888 10534 6785 17319 11379 7366 18745
Total
Share 81.9% 72.6% 77.9% 82.1% 73.6% 78.5% 84.8% 76.2% 81.2% 85.9% 77.5% 82.4% 87.2% 79.9% 84.2%
(%) of
World
Total
World 10,069 7,684 17,752 10,950 8,202 19,152 11,375 8,188 19,563 12,267 8,758 21,025 13,045 9,214 22,259
Total

Compiled by INGRES

With the global economy expected to continue to show strong growth, demand for textile fibres
is also expected to continue on its high growth path. Global polyester demand is expected to
grow at over 4% per annum during 2005-08, which is lower than the growth rates of 4.8% and
9.7% per annum achieved during 1998-2002 and 1994-98, respectively.

Global PSF demand is expected to grow at over 3% per annum till 2008, which is lower than
the 5.1% achieved during 1998-2002. Chinese PSF demand is expected to increase at a rate of
over 6% per annum till 2008, which again is lower than the 12.5% achieved during 1998-2002
and would depend upon the performance of Chinese textile industry in post quota period
especially when some of its textile articles are expected to continue to face restraints.

Global PFY demand is expected to grow at the rate of over 4% till 2008. Chinese demand for
PFY is expected to increase at 7% per annum over the same period, which is significantly lower
than the 18% achieved during 1998-2002.

However, the capacity additions in polyester fibres (mainly in China) are expected to be faster
than the increase in demand till 2006, with the result that the operating rates are likely to
decline till 2006. Further, polyester intermediates are expected to show strong operating rates
and margins till 2006, with the low global profitability of polyester manufacturers continuing over
short to medium term.

Till 1993, the Indian manmade fibres industry was insulated against global cycles by high
tariffs. But post-1993, the Indian industry has been exposed to global trends through the
lowering of tariff barriers. Consequently, Indian manmade fi bre manufacturers now find their
profitability subject to the same cyclicality as their global counterparts. While the current

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Industry Comment The Indian Manmade Fibres Industry

downturn on account of significant capacity additions in China has severely affected the global
profitability levels, the Indian market has experienced it to a lower extent as the Indian
producers are relatively insulated from the Chinese markets as they dont export significant
quantity of polyester to China.

Raw Material
Most of the manufacturers in the industry are non-integrated with production of fibre
intermediates. However, the few players which have facilities for production of fibre
intermediates have large capacities so that the intermediates industry (except acrylonitrile and
rayon grade wood pulp) are also in surplus capacity.

Polyester Intermediates
Presently, the country is self sufficient in production of polyester intermediates. While two plants
(also the largest plants in the country) manufacture PTA, the other four plants manufacture
DMT. BRPL, RIL and IPCLs operations are integrated with the manufacture of paraxylene.
BRPL and RIL have there own refineries located adjacent to their petrochemical plants.

Indian PTA/DMT Capacities


tonnes per annum
Company Product Location Capacity Remarks
RIL PTA Hazira, 1,280,000 Largest plants in the country;
Patalganga paraxylene sourced from the Jamnagar
plant adjoining the Groups 27 mmtpa
Jamnagar refinery. One of the most
integrated polyester companies in the
world.
IPCL DMT Baroda 30,000 The oldest DMT plant (fully depreciated)
in the country. Integrated with paraxylene
production. Recently acquired by RIL.
Bombay DMT Patalganga 165,000 Largest DMT plant in the country. The
Dyeing facility is low cost as the equipment was
purchased second hand.
BRPL DMT Bongaigaon 45,000 Integrated with the production of
paraxylene as also polyester fibre.
SVC PTA Mathura 120,000 Second-hand equipment. Facing
Superchem difficulties and funds constraints in
commissioning the plant successfully.
MCC PTA PTA Haldia 425,000 New plant. The parent is a leading
India Japanese chemicals company and has a
Limited significant presence in the chemicals and
fibre intermediates businesses.
Garware DMT Aurangabad 60,000 Old DMT plant; second-hand equipment
Polyester being reset in India. Facing difficulties in
Limited running the plant. The company is a
consumer of DMT and manufactures
polyester film. However, its consumption
is not enough for the 60,000 tonnes of
DMT produced.
Compiled by INGRES

RIL with a large share of the Indian polyester market also has a significant position in the global
market for PTA and paraxylene (raw material for PTA). In line with the other segments of the
polyester chain, RILs facilities are world scale, while the other plants are smaller.

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Industry Comment The Indian Manmade Fibres Industry

MEG, the other intermediate used by the polyester industry, has matched demand supply
position in India. The two large players in the industry are large ethylene producers. MEG,
being an ethylene derivative, is produced in the country by only the captive ethylene producers.

Two out of six plants for ethylene production use molasses, which was the predominant source
of ethylene before sugar price decontrol took place, which rendered ethylene production
through molasses as economically un-viable. RIL with the recent acquisition of SM Dyechem
Limited in December 2004, now owns all the plants except the capacity owned by India Glycols
Limited.

Indian MEG Capacities

Location Year of Capacity Feedstock for


Commissioning (tonnes per annum) Production of Ethylene
India Glycols Nainital 1989 25,000 Molasses
Limited
IPCL Baroda 1973 70,000 Naphtha
RIL Hazira 1992 450,000 Naphtha
RIL Thane 1976 10,000 Naphtha
SM Dyechem* Pune 1993 50,000 Molasses
IPCL, Gandhar Gandhar 1999 100,000 Natural Gas
* - Acquired by RIL in December 2004
Compiled by INGRES

Reliance Industries Limited owns more than 95% of the Indian paraxylene capacity. RIL
produces paraxylene through its two plants located at Hazira and Jamnagar. While the
petrochemical plant at Hazira is an ethylene cracker based on naphtha and produces around
250,000 tpa of paraxylene, the Jamnagar plant is a reformate based aromatics plant producing
1.385 MMT of paraxylene and uses 2.8 MMT of reformate from its adjoining refinery.

Paraxylene Capacity of Indias Aromatics Plants


tonnes per annum
Location Company Capacity Supplier Arrangement
Baroda IPCL 48,600 From pyrolisis gasoline and reformate from the
adjoining Koyali Refinery
Hazira RIL 250,000 From pyrolisis gasoline produced in the cracker
Bongaigaon BRPL 29,000 From its own refinery
Jamnagar RIL 1,385,000 Through its adjoining refinery

Till the commissioning of Jamnagar aromatics plant, India was importing paraxylene
significantly from mainly South East Asia and USA. However, with the commissioning of RILs
unit in 1999, the country has become a net exporter. RIL is estimated to have exported more
than 200,000 tonnes of paraxylene in FY2004.

Other Fibres
Nylon: The fertiliser companies -- GSFC and FACT, produce Caprolactam, the fibre
intermediate for Nylon-6. The fibre intermediates for Nylon-66, the other popular nylon, are not
produced in the country.

Acrylic fibres: In India, Acrylonitrile is produced only by IPCL with the capacity being mainly
for captive use. All the other players in the industry depend upon imports. Despite significant
imports, no project has been implemented for manufacture of acrylonitrile for more than a
decade. Further, IPCLs capacity, which is located at Baroda (state of Gujarat) is only 30,000
tonnes per annum which is significantly smaller than the plants in the other countries. The

Report by ICRA Information, Grading & Research Service Page 17 of 45


Industry Comment The Indian Manmade Fibres Industry

propylene required for the production of acrylonitrile is sourced from the naphtha cracker in the
adjoining complex.

Viscose Fibres: The viscose producers own the Indian rayon grade wood pulp (raw material
for viscose fibres) capacities. The main forest-wood used for generating wood pulp in India is
from the bamboo trees.

The demand for fibre intermediates depends not only on the demand for fibres but also
consumption in other applications. Polyester, apart from being used as a fibre, is also used as
raw material for bottles and films. Thus, the demand for purified terephthalic acid (PTA)/di-
methyl terephthalate (DMT) and mono-ethylene glycol (MEG) also depends on the demand
from these markets. The following table presents the likely future demand scenario for fibre
intermediates, taking into account the demand from other applications as well. A significant
increase in capacity for polyethylene terephthalate (PET) packaging resin is expected to lead to
a faster growth for polyester intermediates than polyester fibres.

Demand for Fibre Intermediates in India

000 tonnes Other Capacity Consumption Demand Capacity


Applications 2005 1998- 2002- 2004- Growth 2005- 2006- 2007- 2008
99 03 05 Rate (%) 06 07 08
PTA/DMT Resin, Film 2005 1344 1612 1785 8-12 1963 2160 2376 3060
MEG Resin,Film, 624.9 479 626 671 8-12 738 812 893 1075
Antifreeze
PX Resin, Film 1723.6 678 1098 1215 8-12 1337 1471 1618 2111
ACN ABS/SAN resins 30 91 125.7 132 0-5 135 139 142 30
Caprolactam Engineering 120 108 91 100 0-2 100 100 100 120
Polymer
PX paraxylene
ACN - Acrylonitrile
Compiled by INGRES

High Fibre Intermediate Prices over short to medium term

World PTA Demand Supply Trends


50,000 94.0%
45,000 92.0%
40,000 90.0%
'000 tonnes

35,000 88.0%
30,000 86.0%
25,000 84.0%
20,000 82.0%
15,000 80.0%
10,000 78.0%
5,000 76.0%
0 74.0%
1996

1997

1998

1999

2000

2001

2002

2006E

2008E
2003A

2004E

2005E

2007E

Capacity Consumption Operating Rate

Compiled by INGRES

Report by ICRA Information, Grading & Research Service Page 18 of 45


Industry Comment The Indian Manmade Fibres Industry

The global demand for PTA is expected to increase (from 2005 to 2009) at the rate of more
than 5%, with a substantial increase in demand arising from China and other developing
countries (for use as fibre) and the developed countries (for use as PET packaging resin).
Currently the margins are high as the capacity additions were small and the rise in demand was
higher. The conversion margins for PTA (over PX) are expected to continue to remain high till
mid-2006. The high crude oil prices are expected to further add to prices of PTA and thus, the
prices are expected to remain high over the medium term.

The growth in MEG demand for PET consumption is likely to be more than 5% per annum over
the period 2005-2008. The other ethylene oxide derivatives (EODs) are expected to report a
lower growth rate of around 3% per annum from 2005 to 2008. In non-glycol EODs, above-
average growth rates are likely in Ethanolamines and Ethoxylates, while below-average rates
may be seen in Polyols and Glycol Ethers till 2007. Significantly high level of shortage has
resulted in high margins in MEG production currently. However, significant capacity additions
are expected to occur in the Middle East and Asia post 2005, thereby reducing operating rates
and margins.

World MEG Demand Supply Trends


25,000 120.0%

20,000 100.0%
'000 tonnes

80.0%
15,000
60.0%
10,000
40.0%
5,000 20.0%

0 0.0%
1996

1997

1998

1999

2000

2001

2002

2006E

2008E
2003A

2004E

2005E

2007E

Capacity Consumption Operating Rate

Compiled by INGRES

Global PX capacity increased through 1999 and 2000. Most of the erosion in overall polyester
margins during the last downturn in 1999 happened in PX, which was the last in the chain to
enter the build cycle. Now, with small capacity additions and strong demand growth, the
operating rates and margins in PX are expected to increase and touch a peak in 2005-2006.

Report by ICRA Information, Grading & Research Service Page 19 of 45


Industry Comment The Indian Manmade Fibres Industry

World PX Demand Supply Trends


35,000 100.0%
30,000 90.0%
80.0%
25,000
'000 tonnes
70.0%
20,000 60.0%
50.0%
15,000 40.0%
10,000 30.0%
20.0%
5,000 10.0%
0 0.0%
1996

1997

1998

1999

2000

2001

2002

2006E

2008E
2003A

2004E

2005E

2007E
Capacity Consumption Operating Rate

Compiled by INGRES

Conversion Margins over Raw Material

The operating profits of manmade fibre producers are dependent on the conversion margins,
which is the difference between the cost of fibres and fibre intermediates. Both the prices of
fibres and fibre intermediates are largely outside the control of manmade fibre manufacturers.

In 1998, the prices and margins for manmade fibres were both at their historic lows. In 1999
and 2000, although the prices recovered following a cost-push (because of the increase in
crude oil prices), the margins stagnated at the previous years levels. Following strong increase
in demand in 2002, the margins improved strongly the same year.

Average International Conversion Margins for Fibres and Intermediates


US$/MT
1995 1996 1997 1998 1999 2000 2001 2002
ASF over Acrylonitrile 1059 1178 1007 750 526 534 520 588
Acrylonitrile over Propylene 713 260 269 210 111 415 262 337
Nylon over Caprolactam 1560 1720 1689 775 692 980 1076 988
Caprolactam over Benzene 1397 1193 1154 1068 836 966 679 679
PFY over PTA & MEG 1164 1013 996 570 548 660 753 834
POY over PTA & MEG 655 522 484 328 270 383 364 416
PSF over PTA & MEG 614 497 305 228 223 221 220 304
PTA over Paraxylene 83 382 259 214 169 169 152 154
Paraxylene over naphtha 1257 388 299 174 214 173 183 184
MEG over Ethylene 422 191 259 189 113 162 153 163
Compiled by INGRES

Recent Trends: During Q4 - FY2004, although the increasing international cotton and cotton
yarn prices led to increase in prices of most manmade fibres, the increases in prices of raw
materials on account of increasing petrochemical margins as also increase in crude oil prices
resulted in near stagnation in margins of manmade fibre companies. Subsequently, while the

Report by ICRA Information, Grading & Research Service Page 20 of 45


Industry Comment The Indian Manmade Fibres Industry

raw material prices continued to move upwards, the finished yarn/fibre prices did not increase
mainly on account of stagnating cotton prices. Thus, the conversion margins declined till
Q3FY2005, when the cotton prices also declined. Also the global markets, especially China,
were experiencing significant over-capacity during this period. With the Indian market relatively
insulated from the Chinese markets (India does not export significant quantity of polyester to
China), the conversion margins in India were significantly higher than the global average.

However, during Q1 FY2006, their was a recovery in the margins as the prices of
petrochemicals including fibre intermediates declined from their very high levels.

Prices & Margins Conversion Margins in Recent Past


Rs / Kg
POY PSF PTA MEG POY Margin PSF Margin
Q2 FY2004 69.3 58.8 34.2 40.2 26.3 15.7
Q3 FY2004 74.0 62.3 34.1 40.8 30.9 19.1
Q4 FY2004 74.0 64.5 36.9 43.6 27.5 18.0
Q1 FY2005 71.0 63.3 39.6 47.4 20.9 13.2
Q2 FY2005 75.7 67.3 42.8 54.4 20.5 12.2
Q3 FY2005 76.9 71.5 48.3 65.3 13.0 7.6
Q4 FY2005 71.7 68.0 45.4 54.7 13.9 10.2
Q1 FY2006 72.0 66.2 41.8 47.4 19.7 13.9
Compiled by INGRES

Indias Textile Exports Post 2005


The past two decades have witnessed a significant growth in the exports of textile goods from
India. However, even now, India has a mere 3.1% share of the global trade in textiles and
clothing; the figure for India was as low as 1.8% in 1980. The global trade meanwhile trebled
from around US$96 billion in 1980 to US$ 403 billion in 2002. The failure to provide quality
value-added fabrics and garments and the near absence of contemporary designing facilities
as also quota constraints are some of the major causes for India producing low value-added
yarns and fabrics, even as other countries have moved up the value chain.

Although Indian yarn exports are highly competitive, the market for yarn is small compared with
the overall textile and apparel market. Besides, the yarn market appears to be stagnating,
especially considering the very high growth rates achieved by value-added products, especially
apparel. This is mainly on account of the trend of developed nations increasingly sourcing
finished apparel from the developing world, which has the advantage of lower labour costs. The
Indian weaving and garment manufacturing industry, on the other hand, is small in size and
decentralised. Moreover, it is characterised by inconsistencies in quality. These factors have
lowered the exports growth despite India enjoying a considerable labour cost advantage.

Export Competitiveness of Indian textile products


Strong presence in the entire textile value chain and low labour costs provide the competitive
edge to the Indian exporter.

Indian fabric is competitive in the international market, as cotton and labour (refer following
figure) are relatively cheap in the country. However, the high power and interest costs impair
the advantage to a great extent. Although the investments for modernisation are large, fiscal
incentives announced by the Government in last three budgets alongwith soft interest regime in
the TUFS scheme has provided the fillip to the Indian industry in improving its ability to compete
more effectively in the emerging quota-free global environment.

Report by ICRA Information, Grading & Research Service Page 21 of 45


Industry Comment The Indian Manmade Fibres Industry

Comparison of Labour Costs


(US$ per hour)

Apparel Textiles
16.0 13.5
12.4
12.0
8.0
6.8
8.0

4.0 1.2
0.4 0.3 0.2 0.2 0.2

0.0
UK

ina
ly

ia
A
ce

Ba stan
ka
US
Ita

Ind

h
xic

Ch
an

es
an
Me

ki

lad
Fr

iL

Pa

ng
Sr
Source: World Bank
Note: Textiles(1996) and Apparel (1998)

International Textile Trade: MFA giving way to WTO through 10 year phased ATC
The international textile and apparel trade has been driven by quotas provided by importing
nations to the exporting nations and has been outside the purview of GATT (General
Agreement on Trade and Tariffs) and later on, WTO. Initially, the MFA (Multi Fibre
Arrangement) governed the textile trade between 1974 to 1994.

The Agreement on Textiles and Clothing (ATC), the successor to the MFA, governed the textile
trade during 1994-2004. The complete transition from MFA to WTO took place in four phases
as the following figure shows.

Accession of World Textile Trade to WTO

1995 1998 2002


Integration of 16% Integration of 17% Integration of 18%
of the trade under of the trade under of the trade under
MFA. MFA. MFA.

2004
Complete integration with
WTO framework

At the start of each phase, apart from the removal of items under quota, the quota levels were
also proposed to be increased significantly by 16%, 25% and 25% in each of the three phases.

Report by ICRA Information, Grading & Research Service Page 22 of 45


Industry Comment The Indian Manmade Fibres Industry

However, notably, a very small percentage of textile and clothing products had come out of the
purview of quotas in first two phases. The reasons for this have been two-fold:
Firstly, all the items of textile and clothingwhether previously quota related or not were
included in the list of items on which quotas were to be removed. Secondly, the basis of
percentage of items (according to value) to be removed from quotas was on the 1990 data.
Since significant growth in trade has happened over the years, as a result, developed countries
could adhere to the deadlines even by removing a few of the items from the quotas. Thus,
significant level of quota deregulation has happened only in the last phase of ATC, i.e., post
1.1.2005.

During January to April 2005, i.e. after accession of international textile trade to WTO
framework, Indias Exports to US have increased however, at a slower rate than shown by
China. The developed countries share has declined while the developing countries have
increased their share.

Textile and Apparel Exports to the US

US$ Million Jan-Apr 2004 Jan-Apr 2005 % Change


China 3985.89 6331.02 58.84%
Mexico 2445.71 2316.7 -5.27%
India 1245.71 1584.62 27.21%
Hong Kong 1052.8 808.37 -23.22%
Canada 1083.7 1009.47 -6.85%
Indonesia 867.07 970.5 11.93%
Pakistan 773.37 844.725 9.23%
Bangladesh 608.7 733.6 20.52%
Sri Lanka 498.03 578.54 16.17%
Vietnam 764.56 820.89 7.37%
Rest of World 11606.16 11413.67 -1.66%
Total Imports 24931.7 27412.1 9.95%
Compiled by INGRES

The EU's textile and apparel import figures indicate that imports from India had a 11 per cent
growth in January to May 2005. Imports from China were up by over 36% and reached 7.4
billion Euros.
Imports by EU during January to May

Million Euro Jan-May 2004 Jan-May 2005 % Change


China 5416 7389 36.4%
Turkey 4361 4440 1.8%
India 1990 2209 11.0%
Romania 1685 1528 -9.3%
Bangladesh 1467 1361 -7.2%
Tunisia 1233 1182 -4.1%
Morocco 1103 965 -12.5%
Pakistan 947 788 -16.8%
Rest of World 12449 7816 -37.2%
World 30651 27678 -9.7%
Compiled by INGRES

Report by ICRA Information, Grading & Research Service Page 23 of 45


Industry Comment The Indian Manmade Fibres Industry

The accession of textile trade to the WTO presents both an opportunity and a challenge to the
developing world. While there would be the new opportunities of free market, competition
among the developing countries is also expected to increase, with the result that the share of
the poor performers would be taken away by the good ones.

Although, in the major quota regulated markets worldwide, India used to hit quota ceilings,
which indicates a potential for further possible level of export opportunities, its performance
post dismantling of quotas would critically depend on its ability to compete with Chinese textile
exports. The Chinese textile and apparel industry has demonstrated its ability to meet sharp
increases in export demand. Further, the size of Chinese textile industry is nearly three times
that of India and its apparel exports are larger by even bigger factor. Also, Indian exports
contain more low end and low value added items which would further limit the extent of
increase post quota dismantling. However, with China having joined WTO later in 2001, the
developed countries can impose economic safeguards (till 2007) in order to limit Chinese growth. In
May 2005, the US imposed restraints on China on the following products:

cotton knit shirts & blouses (category 338/339),


cotton trousers (347/348),
cotton & man-made fibre underwear (352/652),
combed cotton yarn (301),
non-knitted mens and boys. cotton & manmade fibre shirts (340/640),
manmade fibre knit shirts and blouses (638/639) and
manmade fibre trousers (647/648).

Recently, EU has also imposed restraints on ten categories of textiles imported from China.
This is likely to help other developing countries including India.

India, however, also needs to shift its focus to exports of textile and clothing based on
manmade fibres. As the following figure highlights, the share of manmade fibre based textile
and clothing was only 16% for Indian exports to the US as against average of 37% of total
exports of textile and clothing to the US.

Fibre Wise Share of US Imports of Textile and Fibre Wise Share of US Imports of Textile and
Apparel from World 2004 Apparel from India 2004

Others
4% Others
Wool 2%
Wool 12%
6%

MMF
16%
Cotton
MMF 53%
37%
Cotton
70%

Compiled by INGRES

Report by ICRA Information, Grading & Research Service Page 24 of 45


Industry Comment The Indian Manmade Fibres Industry

T R E N D S I N P R O D U C T I O N, C O N S U M P T I O N, P R I C E, C A P A C I T Y
UTILISATION

Polyester Filament Yarn

Indian PFY Consumption and Production Trends

1400

1200

1000
'000 tonnes

800

600

400

200

0
1985- 1986- 1987- 1988- 1989- 1990- 1991- 1992- 1993- 1994- 1995- 1996- 1997- 1998- 1999- 2000- 2001- 2002- 2003- 2004-
86 87 88 89 90 91 92 93 94 95 96 97 98 99 2000 01 02 03 04 05

Capacity Production Imports Exports Consumption

Compiled by INGRES

Polyester Staple Fibre

Indian PSF Production / Consumption Trends

800
700
600
500
'000 tonnes

400
300
200
100
0
1980-81

1986-87

1988-89

1990-91

1992-93

1994-95

1996-97

1998-99

2000-01

2002-03

2004-05

Capacity Production Imports Exports Consumption

Compiled by INGRES

Report by ICRA Information, Grading & Research Service Page 25 of 45


Industry Comment The Indian Manmade Fibres Industry

Nylon Filament Yarn

NFY Production/Consumption Trends in India

50.0
45.0
40.0
35.0
30.0
'000 tonnes

25.0
20.0
15.0
10.0
5.0
0.0
1980- 1986- 1988- 1990- 1992- 1994- 1996- 1998- 2000- 2002- 2004-
81 87 89 91 93 95 97 99 01 03 05

Production Imports Consumption

Compiled by INGRES

Nylon Industrial Yarn/Nylon Tyre Cord Fabric

Production / Consumption Trends of Nylon Industrial Yarn/Tyre Cord Fabric in India

80.0

70.0
60.0

50.0
'000 tonnes

40.0
30.0

20.0
10.0

0.0
1980- 1985- 1986- 1987- 1988- 1989- 1990- 1991- 1992- 1993- 1994- 1995- 1996- 1997- 1998- 1999- 2000- 2001-
81 86 87 88 89 90 91 92 93 94 95 96 97 98 99 2000 01 02

Production Imports Consumption

Compiled by INGRES

Report by ICRA Information, Grading & Research Service Page 26 of 45


Industry Comment The Indian Manmade Fibres Industry

Acrylic Staple Fibre

Indian ASF Consumption and Production Trends

160

140

120

100
'000 tonnes

80

60

40

20

0
1989- 1990- 1991- 1992- 1993- 1994- 1995- 1996- 1997- 1998- 1999- 2000- 2001- 2002- 2003- 2004-
90 91 92 93 94 95 96 97 98 99 2000 01 02 03 04 05

Capacity Production Imports Consumption

Compiled by INGRES

Viscose Staple Fibre

Indian VSF Consumption and Production Trends

400

350

300

250
'000 tonnes

200

150

100

50

0
1985- 1986- 1987- 1988- 1989- 1990- 1991- 1992- 1993- 1994- 1995- 1996- 1997- 1998- 1999- 2000- 2001- 2002- 2003- 2004-
86 87 88 89 90 91 92 93 94 95 96 97 98 99 2000 01 02 03 04 05

Capacity Production Imports Exports Consumption

Compiled by INGRES

Report by ICRA Information, Grading & Research Service Page 27 of 45


Industry Comment The Indian Manmade Fibres Industry

DEMAND S UPPLY POSITION

Demand
As the following figure highlights, the demand for manmade fibres depends on various factors
that may be classified as:
textile demand generating factors: most notably, income growth in the overall economy;
decline in poverty levels; level of industrial investments; level of automobiles sales; and
exports, and
fibre substitution factors: prices, excise duties and availability in relation to other fibres;
climatic conditions; intangible factors such as image, fashion, look, and attractiveness.

Besides, the local demand for fibres and yarn also depends on two other factors: imports of
manmade fibres and yarn, and of manmade fabrics and clothing.

Manmade Fibres: Determinants of Demand

--Exchange
Rates;
--Domestic Cotton
Prices Vs.
International
Cotton Prices;
--Export
Exports of Cotton,
Textiles & Apparel

Demand for Polyester

Production of
Cotton Textiles Availability Polyester
Domestic MarketFibre
= Production less Exports Differentiation based on:
Tangibles: Comfort, Fit,
Durability and Price
(including excise duties).
Intangibles: Emotional, --Capacities of

Rains, Yield, Use


Attitudinal and Various Players;
-- Costs of
of Pesticides, Psychosocial Product Production,
Pest Damage, Needs, including Image, Imports
Prices and
Demand for Other
Fashion, Appeal,
Crops Confidence in the Look,
and Attractiveness.

Demand for Cotton

Report by ICRA Information, Grading & Research Service Page 28 of 45


Industry Comment The Indian Manmade Fibres Industry

In India, the demand for polyester fibre has risen by over 15% during the last two decades.
Increasing availability, coupled with lower excise duties, has led to this brisk pace of growth.

However, there are two reasons to doubt the continuation of the high growth momentum in
polyester demand in the country. These are uncertainty over what the impact of WTO would be
on the Indian textiles industry, and the already high share of polyester in the domes tic fibre mix.

With international textile trade coming under the WTO from January 1, 2005, the Indian textile
industry has been exposed to market forces. Not only is there now increased competition in the
export markets, but even the domestic market could face the threat of imports. The threat from
imports is real, mainly because of the inefficiency of the domestic weaving sector, which, in
turn, is largely attributable to the stringent regulations on labour in force. Indias strict labour
laws and preference for small-scale sector have historically deterred the establishment of larger
firms in the weaving sector. Consequently, the Indian weaving industry is the least modernised
globally, and uses obsolete machinery. In recent years, the Government has announced
various fiscal measures that seek to encourage modernisation, and hence efficiency, given the
critical bearing that would have on Indias performance.

So far, the increase in the exports of cotton based textiles has provided polyester the
opportunity to raise its share in the Indian market; this, in turn, has increased the demand for
manmade fibres. With China being highly competitive in textiles and clothing and large exporter
of clothing (share of more than 20% already), it has the potential to acquire a substantial share
of the increase in market for developing countries. However, with China having joined WTO
later in 2001, the developed countries can impose economic safeguards (till 2007) in order to
limit Chinese growth. The ability of other developing countries (including India) in competing
with China would be crucial for growth in exports from developing countries. The increased
competition will not only affect India in the export markets but also threaten domestic producers
with imports (especially in the high end premium fabrics and apparel).

Because of the accession of world textile and apparel trade to WTO framework, India's textile
producers all face, primarily, the same challenge: to raise productivity through gains in
efficiency that will still allow them to compete with imports; and continue to expand abroad in
the face of higher cotton prices resulting from conformance with WTO rules and demand
pressures.

The new textile policy is a step to improve productivity and provides the right signals to various
investors to modernise their facilities. Further, the technology upgradation fund scheme
provides soft loans to the textile companies so as to improve their productivity. The extent of
improvement in the level of modernisation would be the key determinant of long-term
performance of the largest sector of Indian industry and its exports. However, as against a
worldwide share of manmade fibre consumption of over 50%, manmade fibre based textiles
account for only 15% of Indian textiles and clothing exports. The share of manmade fibre based
textiles is restricted on account of high excise duties on the same. For strong growth of textiles
and apparel exports post WTO accession, the share of manmade fibre based textiles and
clothing exports would have to be significantly increased in order to address larger portion of
world textiles and clothing market.

Secondly, manmade fibres, especially polyester, are consumed in large proportions in the
household markets now. As the following table shows, the per capita consumption of manmade
textiles has increased at a rate of 6% during 1993-2003. Thus, the share of manmade textiles
in total household purchases has increased from 45.1% in 1993 to 59.0% in 2003. High share
of manmade fibre based textiles pres ent low opportunity for them to further increase their
share.

Report by ICRA Information, Grading & Research Service Page 29 of 45


Industry Comment The Indian Manmade Fibres Industry

Per Capita Consumption (Household Purchases) Growth

Metres 1993 1998 2003 Growth Rate Growth Rate Growth 1993-
1993-98 1998-2003 2003
Cotton 7.6 6.39 7.86 -3.4% 4.2% 0.3%
Pure Silk 0.17 0.26 0.13 8.9% -12.9% -2.6%
Woollen 0.17 0.13 0.1 -5.2% -5.1% -5.2%
Man-made / 6.53 9.42 11.62 7.6% 4.3% 5.9%
blends
All 14.47 16.2 19.71 2.3% 4.0% 3.1%
Compiled by INGRES

Overall, with the saturating domestic market and fast growing export market, the growth of
polyester fibre and yarn is likely to be around 8-10%, while the other fibres are likely to grow at
slower rates.

New Projects

Polyester

RIL is increasing its polyester capacity by 550,000 tpa in phases between Q4 2005 and Q1
2006. The new capacities include 240,000 tpa of PSF in Hazira (Gujarat), 216,000 tpa of PFY,
also in Hazira, and 94,000 tpa of PFY in Patalganga (Maharashtra). A 500,000 tpa PTA plant is
scheduled for start up in 2007-08, while paraxylene capacity will be raised by 532,000 tpa to
1.95 million tpa.

Indo Rama Synthetics (I) Limited (IRSL) is increasing its PSF and PFY capacity significantly by
150,000 tpa each. The commercial production is scheduled to commence from second quarter
of 2006. The cost of project is likely to be Rs 9 billion. IRSL's expansion plan continues to be on
track both on costs as well as on time scale. IRSL has already signed all the loan agreements
with the prospective lenders. Orders have already been placed for all long lead items.

Garden Silk Mills has recently commissioned a continuous polymerisation (CP) project at
Village Jolva with a capacity of 200,000 TPA alongwith 50,000 TPA of direct spinning of POY.
The CP project will fulfill the Company's internal requirement of polymer/chips of about 270
tonnes per day (TPD) for the manufacture of partially oriented yearn (POY). The balance 330
TPD chips will be marketed. The second phase involving direct spinning project will be located
at Jolva adjacent to CP plant. The imported machinery is being ifnanced by Landesbank
Baden-Wuerttemberg, Germany. The plant is being developed on the outskirts of Surat at an
investment of around Rs 3 billion.

JBF Industries is implementing a grass roots 219,000 Polyester Chips plant. The estimated cost
of this project is Rs.1.7 billion and is scheduled to be completed in FY2007. The proposed
expansion will double the company's turnover by 2007. The promoters will also invest and
retain their holding at 39.57 per cent. The company has integrated manufacturing facilities in
Silvassa with capacities of 1,18,800 tpa in polyester chips and 60,000 tpa of PFY.

Bombay Dyeing and Manufacturing Limited too, in order to forward integrate, has announced
plans to put up a PSF manufacturing plant. The company is the largest manufacturer of one of
raw materials (DMT) required to produce PSF.

The significantly delayed 80,000 tpa polyester project of Southern Petrochemicals Industries
Corporation (SPIC) is in an advanced stage of implementation. However, the PTA unit in the
same project is still in preliminary stage. The project continues to face financial difficulties.

Report by ICRA Information, Grading & Research Service Page 30 of 45


Industry Comment The Indian Manmade Fibres Industry

Nylon
SRF has planned investments of over Rs 6 billion by March 2007 to double its industrial fibre
capacity and also consolidate its position as a producer of polyester film. SRF plans to invest
Rs 3.5 billion to double production of industrial fibre capacity at Gwalior and Chennai to 50,000
tonne. With the fresh investment, SRF's Malanpur capacity will be doubled from 11,000 metric
tonnes of nylon tyre yarn to 24,000 metric tonnes, and 10,000 metric tonnes of nylon tyre cord
fabric to 17,000 metric tonnes.

Century Enka Limited is also planning to invest Rs.1.6 billion in expanding its nylon tyre cord
and nylon textile yarn capacity.

Overall Demand Supply


As the following table shows, over-capacity is expected in all fibres in the medium term in India.
In the case of PSF and PFY, a faster growth in capacity than in demand is likely to result in
significant over-capacity over the medium term (even though there is seeming high over-
capacity in PFY currently, because of significant capacities not operating, extent of over-
capacity is lower). In nylon tyre cord fabric, slowly rising demand is likely to provide
opportunities to expand further.

Demand for Fibres in India


(000 tonnes)
Capacity Demand Likely
2005 Capacity
2008
1998-99A 2002-03A 2003-04A 2004-05E Growth 2005-06F 2006-07F 2007-08F
Rate (%)
PSF 700 525 572 596 628 5-10 675 725 780 1100
ASF 145 103 115 119 126 0-5 129 133 136 150
VSF 336.5 180 225 222 226 0-2 228 231 233 350
Total 1107 808 912 936 980 1033 1089 1149
Staple
Fibres
PFY 1390 746 993 1052 1037 5-10 1115 1199 1289 1890
NFY 59 31.4 28 23 31 0 31 31 31 59
NITY 67 63.9 70 71 72 0-3 73 74 75 88
A: Actual; E: Estimated; F: Forecast
NITY: Nylon Industrial/Tyre Yarn
Compiled by INGRES

REVIEW OF P ERFORMANCE

The fluctuating fortunes of the Indian manmade fibres industry are typical of a commodity
industry. During the boom years, companies make bumper returns, while during the slump
years, the performance declines drastically.

Polyester Players

For manufacturers of polyester, material costs (in the case of both integrated and non-
integrated players) account for over 50% of the total cost of sales. The other important
variable cost heads are: power & fuel; and process chemicals & catalyst (included in stores
and spares).

Report by ICRA Information, Grading & Research Service Page 31 of 45


Industry Comment The Indian Manmade Fibres Industry

Between 1996 and 1999, poor margins in the international polyester markets and local
over-capacity had been the main factors prompting the downslide in the Indian polyester
fibre industry. However, low fibre intermediate prices in comparison with polyester fibre
prices resulted in the margins for non integrated polyester manufacturers being higher.

The significant increase in global demand for polyester in calendar 2002 led to a sharp rise
in operating rates and global margins. This, along with the high operating rates in the
domestic market, led to a rise in margins for the non-integrated PFY manufacturers. Thus,
the margins and returns increased significantly between FY2002 and FY2004.

Large capacity additions in China post 2002 led to decline in global operating rates and
profitability. However, Indian polyester players were relatively better placed as the
operating rates in India were high and demand supply situation was nearly matched (after
accounting for capacities not operating). However, rising polyester intermediate prices and
declining cotton prices squeezed margins of polyester players resulting in decline in
operating margins of the Indian polyester industry and consequently, its returns during
FY2005.

Financial Performance of Polyester Companies (other than RIL)

Rs Million FY2005 FY2004 FY2003 FY2002 FY2001


Net Sales 60518.5 54761.0 53539.1 44620.0 49036.1
Other Income 1342.3 3222.4 1544.8 1010.4 719.2
Total Income 61211.5 57466.2 56951.0 45478.3 50553.9
Raw Material 44255.1 36252.2 36442.6 27199.2 33175.0
Power & Fuel 3765.0 4069.8 4436.8 4004.8 4160.4
Other Manufacturing Expenses 3015.8 3180.1 3352.0 2957.0 2924.6
Employee Costs 1627.6 1862.5 1844.5 1991.8 1853.5
Selling Expenses 1812.6 1838.7 2161.1 1784.4 2403.6
Miscellaneous Expenses 747.2 777.1 1038.2 1508.1 810.0
Total Expenses 55187.2 47966.3 49256.6 39442.7 45307.5
Operating Profit 6024.3 9499.9 7694.4 6035.6 5246.4
Interest 1293.6 1876.6 5332.9 5630.7 6494.5
Gross Profits 4730.7 7623.3 2361.5 404.9 -1248.1
Depreciation 2916.8 3105.7 3264.7 3260.8 2976.8
PBT 1813.9 4517.6 -903.2 -2856.0 -4224.9
Tax 159.3 261.4 159.3 66.1 56.2
Deferred Tax 494.5 787.9 963.1 502.1 0.0
PAT 1160.1 3468.3 -2025.6 -3424.2 -4281.1

Rs Million March 31, 2005 March 31, 2004 March 31, 2003 March 31, 2002 March 31, 2001
Share Capital 8568.2 8648.9 9531.6 8491.3 7687.9
Reserves 8557.2 7417.8 -9588.5 -5369.4 -1002.8
Networth 17096.8 15993.8 -227.3 2869.2 6375.3
Secured Debt 16907.5 20735.1 41817.4 41087.4 43063.0
Unsecured Debt 5404.5 4854.3 5604.5 4861.7 4487.2
Total Debt 22312.0 25589.4 47421.9 45949.1 47550.2
Deferred Tax Liability 3361.2 2871.0 2382.7 1052.1 0.0
Total Liabilities 42770.0 44454.2 49577.3 49870.5 53925.5
Gross Block 65499.1 66594.1 70208.8 70092.8 68061.9
Net Block 34913.6 37417.5 40565.9 42861.8 44201.4
Capital Work in progress 2342.5 973.5 2948.4 2623.7 2539.7
Investments 1085.8 3000.3 1917.7 1932.9 1988.5
Inventories 8298.5 8940.4 9465.6 6542.7 6802.9
Receivables 4054.6 3241.3 4139.8 4317.4 4977.6
Cash 719.4 889.5 678.6 741.1 684.3
Loans & Advances 2321.9 2103.4 2665.7 1704.0 2367.9

Report by ICRA Information, Grading & Research Service Page 32 of 45


Industry Comment The Indian Manmade Fibres Industry

Total Current Assets 15394.4 15174.6 16949.6 13305.3 14832.7


Current Liabilities 9740.9 10911.9 11793.5 10194.5 9077.9
Provisions 1225.4 1199.8 1010.8 658.7 558.9
Total Current liabilities 10966.3 12111.7 12804.3 10853.2 9636.8
Net Current Assets 4428.1 3062.9 4145.3 2452.1 5195.9
Total Assets 42770.0 44454.2 49577.3 49870.5 53925.5

FY2005 FY2004 FY2003 FY2002 FY2001


OPM 7.7% 11.5% 11.5% 11.3% 9.2%
ROCE 7.3% 14.4% 8.9% 5.6% 4.2%
Interest Cover 4.66 5.06 1.44 1.07 0.81
Compiled by INGRES

Earlier, the over-capacity in the local polyester market as well as the relatively small
capacities of average Indian plants had resulted in the returns being low (negative in many
cases). In fact, some small capacities with no integration even reported complete erosion
of net worth. The companies that have turned around with large help from the increase in
industry margins, are the ones with medium and large sized capacities (>30,000 tonnes
per annum, or tpa).

RIL, on the other hand, with its large capacities and highly integrated operations, has
withstood the cyclical downturn without having its financial strength significantly impacted.

RILs Financial Performance


Rs Million FY2005 FY2004 FY2003 FY2002 FY2001
Net Sales 659188.3 518496.3 457041.9 421219.4 204433.4
Other Income 16033.8 13987 11876 11983 9825.9
Total Income 669978.6 526429.2 493272.8 424124.1 217438.7
Raw Material 459318.7 347213.9 342776.8 281872.5 123657.5
Power & Fuel 9079.4 7251.5 7194 7396.2 9878.6
Other Manufacturing Expenses 19371.3 17381.8 14902.9 14599 10442.1
Employee Costs 7912.1 7637.9 6163.6 5338 4133
Selling Expenses 27861.2 32565.4 25011.4 19023.1 11746.6
Miscellaneous Expenses 3923.5 4814.2 3599.5 5214 1976.7
Total Expenses 527370.2 416600.4 399608.2 333424.7 161821.5
Operating Profit 142608.4 109828.8 93664.6 90699.4 55617.2
Interest 14686.6 14347.2 15551.6 18251 12159.9
Gross Profits 127921.8 95481.6 78113 72448.4 43457.3
Depreciation 37235 32470.2 28370.9 28161.4 15651.1
PBT 90686.8 63011.4 49742.1 44287 27806.2
Tax 7050 3510 2459 1900 1350
Deferred Tax 7920 7900 6240 9960 0
PAT 75716.8 51601.4 41043.1 32427 26456.2

Rs Million March 31, 2005 March 31, 2004 March 31, 2003 March 31, 2002 March 31, 2001
Share Capital 13930.9 13959.5 13959.2 13958.5 10534.9
Reserves 390102.3 330565 289784.9 264794.1 137118.8
Networth 404033.2 344524.5 303272.6 278124 147653.7
Secured Debt 79729 114511.4 117768.6 141888.9 40684
Unsecured Debt 108116.9 94935.2 79814.5 47395.9 60673.9
Total Debt 187845.9 209446.6 197583.1 189284.8 101357.9
Deferred Tax Liability 42668.2 34748.2 26848.2 20608.2 0
Total Liabilities 634547.3 588719.3 527703.9 488017 249011.6
Gross Block 551258.2 535029.1 505529.9 467273.2 253559.9
Net Block 302529.9 317891.7 320918.3 316504 135144.6
Capital Work in progress 48292.9 33568.1 19944.4 15333.1 5123.8
Investments 170514.6 139714 67227.2 38501.6 67261.1
Inventories 74128.8 72312.2 75104.1 49740.7 22998.5

Report by ICRA Information, Grading & Research Service Page 33 of 45


Industry Comment The Indian Manmade Fibres Industry

Receivables 39278.1 31899.3 29981.1 27224.6 11341.7


Cash 36087.9 2242.4 1472.1 17607.1 1006.3
Loans & Advances 135030.3 120643.8 117013.9 99934.2 55878.6
Total Current Assets 284525.1 227097.7 223571.2 194506.6 91225.1
Current Liabilities 132839.5 102844.7 94908.9 64722.9 41108
Provisions 38475.7 26707.5 9048.3 12105.4 8635
Total Current liabilities 171315.2 129552.2 103957.2 76828.3 49743
Net Current Assets 113209.9 97545.5 119614 117678.3 41482.1
Total Assets 634547.3 588719.3 527703.9 488017 249011.6

FY2005 FY2004 FY2003 FY2002 FY2001


OPM 19.2% 18.5% 17.9% 18.7% 22.4%
ROCE 16.6% 13.1% 12.4% 12.8% 16.0%
Interest Cover 9.71 7.66 6.02 4.97 4.57
Compiled by INGRES

Acrylic Players
The acrylic fibre industry is characterised by very high raw material costs. The other high cost
heads are catalyst, process chemicals, and consumables. However, as the polymerisation of
acrylonitrile (ACN) happens at an extremely rapid pace, and at normal temperature and
pressure, the operating costs in the acrylic industry are lower. The only operating costs are the
costs of conversion to fibres. The cost structure of non-integrated acrylic fibre manufacturers is
not readily comparable with that of the integrated manufacturer, IPCL, as the latter is highly
diversified and the contribution of acrylic fibres to its overall business mix is very small.

In line with the trend in margins over raw material, the gross margins of the Indian acrylic fibre
industry declined significantly during FY1999-FY2001. The net margins and margins after
accounting for capital charges had been positive only in FY1998, which is a pointer to the
industrys low profitability. Several factors such as low plant size, over-capacity, high power
costs and high interest costs have contributed to this low profitability. In line with the trend in
gross margins, the returns of ASF players also declined significantly in FY1996 and FY1999.
The industry (apart from the integrated diversified player, IPCL) is characterised by very low
returns; overall, the industry declared positive shareholder returns only once during the last five
years. The returns (including debt holders returns) for the Indian companies have been higher
than the prevailing interest rates in only one of the last five years, which further points to the
poor profitability of the business.

Starting FY2002, the margins in the acrylic fibre industry have been on an upswing. Th e faster
rise in demand with slow rise in capacity have resulted in the higher operating rates. Even
though, the acrylonitrile prices were also on the upswing (because of increasing crude oil and
rising propylene prices), the higher increase in fibre prices helped the fibre producers. Thus, the
operating margins and returns have increased significantly between FY2002 and FY2005. The
consolidated ROCE of the acrylic fibre industry has improved from 3.6% in FY2001 to 15.8%
in FY2005.

Report by ICRA Information, Grading & Research Service Page 34 of 45


Industry Comment The Indian Manmade Fibres Industry

Financial Performance of Indian Acrylic Fibre Producers

Rs Million FY2005 FY2004 FY2003 FY2002 FY2001


Net Sales 6089.2 7293.8 6149.8 6226.5 6708.5
Other Income 281.3 163.7 104.8 51.3 45.6
Total Income 6405.9 7192.3 6564.2 5908.4 6878.1
Raw Material 4032.2 4625.4 4095.0 3844.9 5028.2
Power & Fuel 579.1 735.2 711.0 748.4 783.8
Other Manufacturing Expenses 155.4 226.1 214.0 198.8 191.2
Employee Costs 179 230.1 216.0 208.8 205.4
Selling Expenses 255.2 331.7 355.7 395.2 410.0
Miscellaneous Expenses 77.5 122.6 85.3 80.0 114.7
Total Expenses 5278.4 6271.1 5677.1 5476.0 6733.4
Operating Profit 1127.5 921.2 887.1 432.4 144.7
Interest 414.9 689.9 690.1 790.4 839.5
Gross Profits 0 0 0.0 0.0 0.0
Depreciation 300.7 447.2 445.5 445.2 447.0
PBT 411.9 -215.9 -248.5 -803.2 -1141.9
Tax 18.8 7 8.8 0.2 0.2
Deferred Tax 23.2 0 0.0 0.0 0.0
PAT 369.9 -222.9 -257.3 -803.4 -1142.1

Rs Million March 31, 2005 March 31, 2004 March 31, 2003 March 31, 2002 March 31, 2001
Share Capital 2755.5 3948.9 3890.9 3881.8 3771.5
Reserves -1102.5 -2455.6 -2087.9 -1788.6 -1145.2
Networth 1651.7 1491.4 1798.5 2085.1 2615.5
Secured Debt 2909.7 5284.8 5015.2 4945.7 5102.2
Unsecured Debt 633.6 498.4 777.6 604.7 700.6
Total Debt 3543.3 5783.2 5792.8 5550.4 5802.8
Deferred Tax Liability 23.2 0 0 0.0 0.0
Total Liabilities 5218.2 7274.6 7591.3 7635.5 8418.3
Gross Block 8651.1 11823.8 11785.6 11552.8 11037.5
Net Block 4645.4 6484.7 7032.7 7286.1 7448.0
Capital Work in progress 50.5 80.9 75.7 123.3 100.3
Investments 15 207.8 6 6.0 0.0
Inventories 1156.7 1427.9 1320.2 1169.1 1348.2
Receivables 115.2 430.7 443.5 497.1 580.7
Cash 111.9 731.7 212.7 150.9 85.9
Loans & Advances 249.4 235.6 251 207.1 331.5
Total Current Assets 1633.2 2825.9 2227.4 2024.3 2346.3
Current Liabilities 1089.1 2280.6 1706.5 1777.1 1432.6
Provisions 36.8 44.1 44 27.0 43.6
Total Current liabilities 1125.9 2324.7 1750.5 1804.2 1476.2
Net Current Assets 507.3 501.2 476.9 220.1 870.1
Total Assets 5218.2 7274.6 7591.3 7635.5 8418.3

FY2005 FY2004 FY2003 FY2002 FY2001


OPM 13.9% 10.4% 12.7% 6.1% 1.5%
ROCE 15.8% 6.5% 5.8% -0.2% -3.6%
Interest Cover 2.72 1.34 1.29 0.55 0.17
Compiled by INGRES

Nylon Players

Material costs, mainly caprolactam costs, account for nearly 50% of the cost of sales of nylon
manufacturers in India. The other important cost head is power & fuel. Power & fuel costs are
the highest for nylon, among all manmade fibres.

Report by ICRA Information, Grading & Research Service Page 35 of 45


Industry Comment The Indian Manmade Fibres Industry

Till FY1999, the gross margins for nylon players in India declined significantly on account of the
global decline in the conversion margins of caprolactam nylon. Indian Caprolactam nylon
margins improved during 2001 following the rise in global margins. With significant increase in
price of benzene (caprolactam is derived from benzene) during 2004, the margins in global
market declined resulting in decline in profitability for Indian players as well. The returns for
nylon players have followed the same trend as their margins.

Financial Performance of Indian Nylon Manufacturers

Rs Million FY2005 FY2004 FY2003 FY2002 FY2001


Net Sales 20103.7 17441.3 15998.9 14165.2 15538.4
Other Income 443.8 393.3 460.7 804.6 1356.6
Total Income 20672 17751.8 16797.5 14737 16896.4
Raw Material 13749.9 10601.9 9318.1 7295.1 8495.6
Power & Fuel 1643.8 1640.8 1742 1617.3 1708
Other Manufacturing Expenses 773.6 865.1 853.1 1005 1111.3
Employee Costs 839.7 1119.5 1045.7 1042 946.9
Selling Expenses 538.9 483.4 507.6 484.7 528
Miscellaneous Expenses 378.7 418.5 577.7 421 437.5
Total Expenses 17924.6 15129.2 14044.2 11865.1 13227.3
Operating Profit 2747.4 2622.6 2753.3 2871.9 3669.1
Interest 295.2 389.3 572.3 747.8 1093
Gross Profits 2452.2 2233.3 2181 2124.1 2576.1
Depreciation 955.3 932.2 907.5 1249.2 861
PBT 1496.9 1301.1 1273.5 874.9 1715.1
Tax 183.7 223.6 93.6 68.8 73.3
Deferred Tax 187.1 318.2 313.7 220.9 0
PAT 1126.1 759.3 866.2 585.2 1641.8

Rs Million March 31, 2005 March 31, 2004 March 31, 2003 March 31, 2002 March 31, 2001
Share Capital 941.9 1524.1 1524.1 1524 1537.7
Reserves 9557.3 8022.5 7474.1 7128.6 8023.1
Networth 10499.2 9546.6 8989.1 8614.7 9487.3
Secured Debt 5816.9 3381.1 3772.2 4569.2 5574.1
Unsecured Debt 723.9 255.3 346.4 651.2 1106.2
Total Debt 6540.8 3636.4 4118.6 5220.4 6680.3
Deferred Tax Liability 2288 2080.6 1762.3 1448.7 0
Total Liabilities 19328 15263.6 14870 15283.8 16167.6
Gross Block 25147.2 23106.2 22999.2 22771.4 22437.4
Net Block 13181.6 10837.8 11259.1 11666.2 12101.5
Capital Work in progress 2091.8 1008.9 221.6 302.3 494.1
Investments 1157.4 1490.3 1107.3 1262.3 1189.3
Inventories 3383.9 2458 2445.6 1872.5 2116.6
Receivables 1453.6 1435.7 1556.7 1635.1 1600.2
Cash 178.2 609.9 316.9 314.6 356
Loans & Advances 1246.1 944.8 1088.9 903.6 1206
Total Current Assets 6261.8 5448.4 5408.1 4725.8 5278.8
Current Liabilities 2737.7 2899.2 2599.9 2205.6 2316.2
Provisions 626.9 622.6 526.2 467.2 579.9
Total Current liabilities 3364.6 3521.8 3126.1 2672.8 2896.1
Net Current Assets 2897.2 1926.6 2282 2053 2382.7
Total Assets 19328 15263.6 14870 15283.8 16167.6

FY2005 FY2004 FY2003 FY2002 FY2001


OPM 11.5% 12.8% 14.3% 14.6% 14.9%
ROCE 9.3% 11.1% 12.4% 10.6% 17.4%
Interest Cover 9.31 6.74 4.81 3.84 3.36
Compiled by INGRES

Report by ICRA Information, Grading & Research Service Page 36 of 45


Industry Comment The Indian Manmade Fibres Industry

Viscose Players

In the viscose staple fibre (VSF) industry in India, material costs form a lower percentage of the
cost of sales as compared with the other fibres, indicating higher value addition by the industry.
The process of manufacture of VSF is highly power-intensive as highlighted by the high power
cost as percentage of cost of sales. The fixed costs for the larger player, Grasim Industries
Limited (GIL), are lower than those for the smaller one, SIV Industries, because of scale
economies. Further, the presence of GIL in other businesses like cement complicates the cost
structure (GILs freight costs are higher).

The profitability of viscose fibre manufacture hinges on the prices of its substitutes. With the
prices of polyester in the global and local markets declining from FY1995 to FY1999, the gross
margins for domestic VSF players also declined. In FY2000 and later, the local VSF
manufacturers finally saw an uptrend with the cost-push impact of rising crude oil prices leading
to an increase in the prices of substitutes (mainly polyester). With increase in demand for VSF
globally, the operating rates and consequently, the margins have been on the rise post 2002.

In line with the decline in margins, the returns of the domestic VSF players also fell till FY1999,
but increased thereafter. However, for the small capacity player, SIV Industries, the continuing
losses resulted in the companys net worth turning negative in FY2000. The large sized player
has increased its revenue from the VSF business with rising sales volumes of VSF.

Performance of Viscose Fibre Producers

Rs Million FY2005 FY2004 FY2003 FY2002 FY2001


Net Sales 62060.7 52217.5 46092.7 43837.5 47583.3
Other Income 2215.4 2292.9 1392.6 1318.1 1343.2
Total Income 65514.7 54181.9 47317.5 44128 49555.6
Raw Material 19220.7 14229.6 11935.3 12436.8 16285.3
Power & Fuel 10357.4 8890.1 8574.6 7433.4 8058.8
Other Manufacturing 4630.3 4176.6 3895.6 3453 4111.9
Expenses
Employee Costs 3703.1 3575.5 3337.6 4168.3 3747.5
Selling Expenses 8443 7574.1 7339.9 7270.4 6902.6
Miscellaneous Expenses 1889.8 694 3014.9 1714.7 1424
Total Expenses 48244.3 39139.9 38097.9 36476.6 40530.1
Operating Profit 17270.4 15042 9219.6 7651.4 9025.5
Interest 1387.6 1538.8 2469.7 2291.7 3523.6
Gross Profits 15882.8 13503.2 6749.9 5359.7 5501.9
Depreciation 2845.7 2730.6 2829.1 2662.2 2945.3
PBT 13037.1 10772.6 3920.8 2697.5 2556.6
Tax 4510 2910 1520 -116.1 500
Deferred Tax -330 70 -150 515 0
PAT 8857.1 7792.6 2550.8 2298.6 2056.6

Rs Million March 31, 2005 March 31, 2004 March 31, 2003 March 31, 2002 March 31, 2001
Share Capital 916.9 916.9 2208.1 2208.1 2208.1
Reserves 42366.6 35191.4 24484 22977.9 27500.4
Networth 43283.5 36108.3 26692.1 25186 29708.5
Secured Debt 14725.5 13561.4 21435.7 21243.1 20346.1
Unsecured Debt 5357.9 7090.9 6356.1 5597.8 4485.6
Total Debt 20083.4 20652.3 27791.8 26840.9 24831.7
Deferred Tax Liability 5995 6325 6255 6405 0
Total Liabilities 69361.9 63085.6 60738.9 58431.9 54540.2
Gross Block 59107.7 57281 61449.1 59046.8 58762.6

Report by ICRA Information, Grading & Research Service Page 37 of 45


Industry Comment The Indian Manmade Fibres Industry

Net Block 30626 31391.8 35280.9 35386.5 36239.4


Capital Work in progress 1459.4 790.9 1333.6 1435.5 1225.7
Investments 29820.2 25406.5 17978.6 14179.4 6843.8
Inventories 6785.9 4594.6 5708.4 5797.9 7627.3
Receivables 5220.1 4846.3 4377.2 5096.4 6437.3
Cash 867 2274.8 1103.6 1487.3 1599
Loans & Advances 5666.3 3244.4 4597.9 4174.7 4578.3
Total Current Assets 18539.3 14960.1 15787.1 16556.3 20241.9
Current Liabilities 8278.9 7521 8270 7954 8164.9
Provisions 2804.1 1942.7 1371.3 1171.8 1845.7
Total Current liabilities 11083 9463.7 9641.3 9125.8 10010.6
Net Current Assets 7456.3 5496.4 6145.8 7430.5 10231.3
Total Assets 69361.9 63085.6 60738.9 58431.9 54540.2

FY2005 FY2004 FY2003 FY2002 FY2001


OPM 24.3% 24.4% 17.0% 14.4% 16.1%
ROCE 20.8% 19.5% 10.5% 8.5% 11.1%
Interest Cover 12.45 9.78 3.73 3.34 2.56
Compiled by INGRES

CRITICAL S UCCESS F ACTORS


Initially, a company engaged in the production of manmade fibres/yarn has the option:
to plan its operations and set up the largest capacities that the market can absorb,
to plan the level of its participation in the manmade fibre chain,
to set up its plant at the most suitable location, and
to use the most cost-effective technology.

To a large extent, these factors determine the profitability and cost structure of a manmade
fibre company while later efforts are focused more on managing the facilities efficiently and
effectively. The following analysis brings out the key success factors not only for the existing
manmade fibre operations in India, but also the upcoming ones.

Enhancement of Capacities
Whether a new manmade fibre player plans a grassroots project or an existing player plans an
expansion, it has to make a choice on capacity, fibre mix, level of integration, and technology to
be used. Further, its skill in actually implementing the project is vital for the future.
Careful Planning of Medium and Long Term Trends: Capacities, Level of Integration and
Timing
Capacity size, level of integration, and timing of the project are critical for the overall success
and profitability of a manmade fibres manufacturing company. The decisions regarding these
choices are to be made at the planning stage of the project on the basis of the medium- and
long-term industry trends. Accurate forecasting of these trends is vital for the success of a
manmade fibres company.
Synthetic Fibre Capacities
High capacities provide a player an opportunity to minimise fixed costs. Given the advantages
2
of economies of scale , every player would like to set up the largest capacities possible.
However, the eventual capacity gets restricted by the extent of unmet demand in the market,
besides the players financial strength (discussed later). It is critical that the manmade fibre
company concerned accurately predict the extent of unmet demand. If it predicts too large a
capacity, there would be an over-capacity in the market in the initial years when the plant

2
the per unit poly-condensation cost is lower, standby manufacturing facilities are distributed over larger
production, per unit fixed costs are lower, and bargaining power in raw material procurement is higher

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Industry Comment The Indian Manmade Fibres Industry

comes on stream. On the other hand, if the capacity predicted is too small, the company may
not be able to achieve the desired economies of scale. The choice of fibres to be produced is
also vital for the overall profitability of a project.
Integration
Integration of a product with its raw materials allows a manufacturer have greater control over
operations. Besides, integration of a petrochemical plant with its downstream units and utilities
has many advantages on its own. Integration provides the opportunity for optimum investment,
best high capacity operation, safety, optimum energy utilisation, and other economic
advantages. Since all the intermediates in an integrated petrochemical complex are produced
and used captively, such complexes have lesser storage requirements for intermediate
products. This leads to lower transportation costs, fewer storage hazards, and minimal statutory
taxes. By integrating all the utilities such as those for steam, power, de-mineralised water,
process water, cooling water, refrigerant nitrogen, and process air, not only is the investment
requirement optimised but higher efficiency is also provided for. Integration reduces the overall
energy and utilities costs, which account for 15%-20% of the variable costs of a petrochemical
complex. Besides the company-intrinsic factors mentioned, because the fibre intermediates
industry is in fewer hands (both globally and locally), the bargaining power of the intermediates
industry is higher, and consequently, they share a higher amount of profits vis- -vis the
downstream fibres industry. Also, the returns of a company have lesser risk when it is
integrated than otherwise.
Timing
Worldwide, petrochemical markets (including the ones for fibres and fibre intermediates) are
characterised by cyclicality in margins, caused by the collective implementation and operation
of capacities by various players. If a player times a project in such a way that it starts operating
at the upswing, possibilities of significantly enhancing shareholder value are high. But to
determine the upswing, the player must be able to predict the global demand and supply trends
accurately. Besides, the player would have to have adequate financial strength to implement
the project.
Financial Strength
Petrochemical projects are capital intensive and require large capital for establishment. The
project cost for a fibre (and fibre intermediates) manufacturing facility is substantially higher
than that for a downstream plant alone. Given the high project cost, financing becomes crucial
and can play a critical role in determining the profitability of the project during the course of its
operation. Further, if a high amount of debt is used, the cost would be high during the initial
years of operation and this would impact profitability significantly.
Capital Cost
The cost of setting up a manmade fibre project determines, to a great extent, the production
cost of fibres, and consequently, the profitability of a manmade fibre company. For a manmade
fibre facility, the plant & machinery cost is the single largest contributor to the project cost. The
actual plant & machinery cost varies with the technology used. Further, significant economies
can be achieved by setting up large capacities. The project cost also has a significant
contribution from the interest capitalised during the course of the project.Costs apart, a critical
factor in the construction of a manmade fibre facility at competitive terms is project
management skill (since construction time is of vital importance).
Selection of Technology
Since cost efficiencies are of vital importance, the employment of the latest and best
technology is essential. Low-cost, efficient technology is especially important in the wake of
narrowing margins. Thus, while new plants use 0.852 tonne of PTA per tonne of partially
oriented yarn (POY), the older ones use 0.91 tonne. Similarly, while the new plants use 0.335-
0.35 tonne of MEG per tonne of POY, the older ones use 0.37-0.38 tonne. Chip to fibre
manufacture involves significant quality considerations and the process can be used in various
ways (by altering process parameters) to yield different fibres for different requirements.
Further, significant losses can occur on account of poor drawing of POY, which in turn would
impact the overall yield of the process. Manufacturers save on these losses by investing in fully
automated processes of yarn/fibre manufacturing.

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Industry Comment The Indian Manmade Fibres Industry

Location
Finished manmade fibres have a high freight cost element. While polymers have a freight cost
component of US$200 per tonne from the US to South Asia, fibres have US$400 per tonne as
the freight cost component between the two regions. Therefore, proximity to markets is a key
issue and players locate their facilities close to the texturisers and weavers. Thus, major
capacities in the Indian market are located on the West, the major textile centre in the country.
Further, acrylic fibre capacities are located in the Northern region, the major knitwear centre.

Current Facility Management


Although the cost of production of manmade fibres at a manufacturing facility depends largely
on the parameters available at the design stage of the plant, there is still some scope for
improvement at a later stage through better management.
Higher Utilisation
As in the case of any commodity company, running a manmade fibre plant at high utilisation
levels is essential. The extent of utilisation, however, is dependent on the ability to sell the
produce (besides technical competence). Sales in an over-capacity manmade fibre market
depend not only on the cost of production, but also on timely despatches and their consistency,
the credit schemes offered, the reach of the distribution network, and the ability to provide
technological help to processors, and develop new speciality fibres as well.
Raw Material
Raw material costs account for 30-45% of the operating income of a manmade fibre producer
(higher for only-downstream plants). Consequently, companies spend significant resources and
time on efficient and effective management of raw materials. There are two aspects to raw
material management: minimising the per unit costs, and maximising the process yields from
the raw material (by monitoring the process conditions and minimising losses). An effective
supplier arrangement, which insulates a manmade fibre company against cyclicality in raw
material prices, and an equity stake in the supplier company can help a manmade fibre player
minimise raw material costs.
Catalysts & Chemicals
For a manmade fibre plant, the second most important cost head is catalysts, chemicals and
stores consumed. Since most of these special chemicals and catalysts are produced by small
players in the global market (catalysts are sold mostly by the licensor), their prices are beyond
the control of domestic players. To minimise costs, manmade fibre players need to minimise
losses, and manage the costs of catalysts and special chemicals effectively. Many measures to
effectively control the use and therefore the cost of these chemicals are built in at the design
stage of the project itself. Still, careful use of these chemicals can hardly be overemphasised.
Power & Fuel
For a manmade fibre company, power and fuel costs account for 7-15% of its cost of sales.
Unreliable power supply by the State grid and rising power tariffs (for external power) have
forced many Indian manmade fibre companies to set up captive power plants. Besides captive
plants, the judicious use of fuels (different fuels have different costs per energy units) also
helps manmade fibre companies cut down their power and fuel costs. Further, manmade fibre
companies invest significantly in energy saving measures.

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Industry Comment The Indian Manmade Fibres Industry

O UTLOOK
With the global economy expected to continue to show strong growth, demand for textile fibres
is also expected to continue its high growth path. Global polyester demand is expected to
increase at over 4% per annum during 2005-08, which is lower than the growth rates of 4.8%
and 9.7% per annum achieved during 1998-2002 and 1994-98, respectively.

Global PSF demand is expected to grow at over 3% per annum till 2008, which is lower than
the 5.1% achieved during 1998-2002. Chinese PSF demand is expected to increase at a rate of
over 6% per annum till 2008, which again is lower than the 12.5% achieved during 1998-2002
and would depend upon the performance of Chinese textile industry in post quota period
especially when some of its textile articles are expected to continue to face restraints.

Global PFY demand is expected to grow at the rate of over 4% till 2008. Chinese demand for
PFY is expected to increase at 7% per annum over the same period, which is significantly lower
than the 18% achieved during 1998-2002.

However, the capacity additions in polyester fibres (mainly in China and India) are expected to
be faster than the increase in demand till 2006, with the result that the operating rates are likely
to decline till 2006. Further, polyester intermediates are expected to show strong operating
rates and margins till 2006, with the low global profitability of polyester manufacturers
continuing over short to medium term.

The quota system in the textile sector has disappeared with effect from January 1, 2005, and
international trade in textile and clothing is now conducted on a non-discriminatory basis
(between WTO members). Although this will result in the market increasing for the developing
nations (including India), the guarantee of quota will not be there, even as competition would
increase and regional bloc agreements would assume greater importance.

With China being highly competitive in textiles and clothing and large exporter of clothing
(share of more than 20% already), it has potential to acquire a substantial share of the increase
in market for developing countries. However, with China having joined WTO later in 2001, the
developed countries can impose economic safeguards (till 2007) in order to limit Chinese
growth. The ability of other developing countries (including India) in competing with China
would be crucial for growth in exports from developing countries. The increased competition will
not only affect India in the export markets but also threaten domestic producers with imports
(especially in the high end premium fabrics and apparel). In May 2005, the US imposed
restraints on China on the following products:

cotton knit shirts & blouses (category 338/339),


cotton trousers (347/348),
cotton & man-made fibre underwear (352/652),
combed cotton yarn (301),
non-knitted mens and boys. cotton & manmade fibre shirts (340/640),
manmade fibre knit shirts and blouses (638/639) and
manmade fibre trousers (647/648).

Recently, EU has also imposed restraints on ten categories of textiles imported from China.
This is likely to help other developing countries including India.

Because of the accession of world textile and apparel trade to WTO framework, India's textile
producers all face, primarily, the same challenge: to raise productivity through gains in
efficiency that will still allow them to compete with imports; and continue to expand abroad in
the face of higher cotton prices resulting from conformance with WTO rules and demand
pressures. The new textile policy is a step to improve productivity and provides the right signals

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Industry Comment The Indian Manmade Fibres Industry

to various investors to modernise their facilities. Further, the technology upgradation fund
scheme provides soft loans to the textile companies so as to improve their productivity. The
extent of improvement in the level of modernisation would be the key determinant of long-term
performance of the largest sector of Indian industry and its exports. However, as against a
worldwide share of manmade fibre consumption of over 50%, manmade fibre based textiles
account for only 15% of Indian textiles and clothing exports. The share of manmade fibre based
textiles is restricted on account of high excise duties on the same. For strong growth of textiles
and apparel exports post WTO accession, the share of manmade fibre based textiles and
clothing exports would have to be significantly increased in order to address larger portion of
world textiles and clothing market.

Historically, the Government had been levying much higher excise duties on synthetic fibres
and yarns in comparison with cotton. However, over the last decade, the excise duties on
synthetic fibres and yarns have been lowered. This process is expected to continue, thus
eventually removing the excise bias against manmade fibres.

The demand for polyester in the domestic market increased at the fast pace of over 15% till the
late 1990s. Currently, polyester accounts for a significant 40% share of the countrys total fibre
consumption (for ultimate use in the domestic market, the share is even higher at around 55%).
Further, the weaving industry finds it difficult to export synthetic fibre based textile goods on
account of high excise duty on polyester as also its own weaknesses. So far, the growth of
textiles and clothing exports from the country has been high post January 1, 2005, which is
likely to continue over medium term in light of restraints of growth on Chinese exports by
leading importersUS and EU. Thus, with slow growth in domestic market and strong growth
in exports, the textile industry and in turn, demand for manmade fibres, is likely to show
moderate growth in turnover.

Polyester Margins: Going forward, over the short term, the prices of raw material (fibre
intermediates) are likely to remain moderately high on account of high petrochemical margins
(on account of increasing global operating rates) and high crude oil prices. The prices of
manmade fibres would remain linked with cotton prices as also average operating rates of
manmade fibre industry both at regional and global level. Cotton prices at the global level are
expected to stagnate at their low levels. The global operating rates in manmade fibres are likely
to remain low mainly on account of significant increase in the capacity in China. With significant
capacity being commissioned, the polyester industry in India is likely to witness over-capacity
over the medium term unless the exports of textile and clothing increase significantly. With fibre
intermediate margins likely to remain high over short to medium term, the non integrated
players are likely to continue to witness low margins. Further, high excise duty on the manmade
fibres vis- - vis cotton would continue to deter the fabric producers from purchasing high
volumes of manmade fibres. Overall, thus margins of manmade fibre producers are likely to
remain under pressure in the short to medium term, albeit to a lesser extent then during
FY2005.

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Industry Comment The Indian Manmade Fibres Industry

AN N E X U R E 1 . P O L I C Y R E F O R M S I N T H E I N D I A N T E X T I L E I N D U S T R Y

While the quotas put restraints, they also protected the share of developing country in textile
and clothing exports. While Indian yarn exports have a large share in the world, same is not
true about the apparel sector. Thus, the industry need to add significant value to its product
profile. To safeguard against the risks posed by the liberalising trade of textiles in the
international market as also increased competition, the Government of India has announced
several measures in the past in order to vitalise the textile industry and increase its productivity.
In November 2000, the Government of India came out with a new textile policy (refer following
figure) that outlines the direction of policy reforms to be followed in the near term. The steps
outlined in the policy are geared mainly towards removing the bias in policy towards the small-
scale sector and promoting modernisation. The Government removed readymade garments
subsequently from the list of products reserved for the small-scale sector.

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Industry Comment The Indian Manmade Fibres Industry

The Government announced the technology upgradation fund scheme (TUFS) in 1998 that
provides for soft loans to textile companies so as to enable them to improve their productivity.
The Government has also announced several fiscal steps in last five-year budgets aimed at
improving the efficiency of the textile sector (refer following table).

Major steps in the Union Budgets of last five years

Union Budget Major Reforms


2001-02 Reduction in customs duty on modern textile machinery
Budget provision raised for automatic looms under TUFS;
Higher depreciation rate was allowed for those availing TUFS for automatic
looms;
Scheme for setting up Integrated Apparel Parks initiated;
2002-03 Excise duty exemption on hank yarn was abolished.
Excise duty on processed fabrics (other than industrial fabrics), made-ups and
garments reduced;
Excise duty rationalisation and
Excise duty on automatic shuttle-less looms, specified processing machinery,
specified jute machinery and specified silk reeling, weaving and twisting
machinery was also removed. The customs duty on specified silk reeling,
weaving and twisting machinery was also reduced from 25% to 10%.
2003-04 Reduction in excise duty on most textile items including polyester filament yarn
(PFY)
Completion of Cenvat chain and removal of deemed credit
Reduction in basic customs duty on apparel grade raw wool
Reduction in customs duty on a large number of textile machinery and their
parts
For strengthening the power loom sector, a number of measures announced.
2004-05 Modification of Cenvat: The Cenvat Scheme was made optional.
However, excise duty on manmade fibres and filament yarns only
(including texturised yarns) to continue to be mandatory.
Blended textiles and pure non-cotton (polyester, viscose, acrylic and
nylon) to have a different excise duty regime. For the pure cotton
sector, the uniform rate was to be 4% on yarn, fabrics, garments and
made -ups. For the blended textiles sector and pure non-cotton sector,
the uniform rate was to be 8% .
Further reduction in customs duty on capital imports for textile and
garment making machinery.
2005-06 De -reservation of Knitwear sector from SSI list.
Enhanced allocation for TUFS and additional bene fits of 10%
capital subsidy for the textile processing sector.
Measures announced for handloom sector.
Customs duty on textile machinery reduced.
Customs duty on fibres, yarns, intermediates, fabrics and
garments reduced.
Cut in excise duty on polyester partially oriented yarn/polyester
filament yarn. Texturisers under optional Cenvat.
Compiled by INGRES

With the removal of the protectionist bias in favour of the small-scale sector, the long-term impact of the
reforms on the industry is expected to be significantly positive. With textiles trade coming under the
ambit of the World Trade Organisation (WTO), an inefficient weaving sector could have posed a serious
problem for the Indian textiles industry. The policies drawn up to encourage investments in installing
modern weaving machinery as well as the removal of policy measures that have hitherto protected the
decentralised sector, are expected to provide a boost to the textiles sector as a whole over the long term.

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Industry Comment The Indian Manmade Fibres Industry

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Report by ICRA Information, Grading & Research Service Page 45 of 45