Executive Summary

Executive Summary

Consolidation in global textile space - India one of the biggest beneficiaries

India has been one of the biggest beneficiaries of the abolition of quotas on textile imports by the US
and EU after the Agreement on Textiles and Clothing expired on January 1, 2005. Global retailers,
accounting for the bulk of imports into their countries, used to source from all over the world because
of the quotas, which were allocated to various countries. These retailers are now consolidating their
sourcing activities and reducing the number of countries they source their products from, the primary
consideration being the cost of production and manufacturing lead times. Exports to the US from India
have increased by 27% where as most of the countries having US$ 1 bn plus exports to the US
witnessed negative growth. Likewise, India has been one of the biggest beneficiaries of exports to the
EU as well; it was one of the two countries with billion euro plus exports to the EU who could increase
their market share while eleven such countries saw a decline in their market share.

Strong domestic demand supporting the exports opportunity

The Indian domestic textile market is witnessing strong growth led by a young consuming population
(median age of 24 years), its fast growing economy and rising household income levels, and over 30%
growth in the organized retailing sector. The Indian apparel market, which was valued at INR 777 bn in
2004, has grown by more than 13.6% to INR 883 bn in 2005. Going forward, we expect the share of
the organized branded segment to continue to grow as the number of urban households in the high
and middle income classes grow and the younger population has more disposable income. Nearly
two-third of India’s population is under 35 years of age – which makes consumers spend more on
lifestyle products. We estimate that the number of households with an annual income of more than INR
500,000 will double over the next few years. This, coupled with the growth of organized retailing should
lead to an increase in demand for high quality products. Increase in the number of new urban house-
holds, higher spending on home textiles by Indian consumers and growth in organized retailing will fuel
the growth in home textiles as well.

Companies with weaving and processing capacities to benefit most

We believe that companies which are putting up fabric manufacturing capacities will benefit the most
from the increasing demand because: (a) weaving and processing, with fragmented capacities and
low technological absorption, are the weakest link in this sector today; (b) these companies can
forward integrate into manufacturing of garment manufacturing/made-ups or branding or retailing or/
and backward integrate into spinning to reduce their costs; and (c) easy availability of subsidized debt
and government subsidies in this sector increases the return on investments in these projects. The
companies which will benefit can be either fabric manufacturers or integrated players producing
apparel or made-ups, especially cotton based in which India has inherent strength.

Top picks

Our top picks are from both the sectors - apparel as well as home textiles. From the apparel sector, our
top picks are Bombay Rayon Fashions, which is the only garment manufacturer with expertise in fabric
development; Mahavir Spinning, which is aggressively expanding its apparel fabric manufacturing
capacities; and Alok Industries which is the largest apparel fabric manufacturer after Arvind Mills. Alok
Industries is also a major player in the home textiles sector which along with Himatsingka Seide and
Welspun India are our top picks.