Institute of Chartered Financial Analysts of India (ICFAI) University 2006 Certification Finance Security Analysis-II - Question Paper

Exports and expansion spree

Textile exports, which were growing at close to 10% before quotas were removed in ’05, have grown nearly 20% to clock revenues of $13bn for the calendar year 2005. India’s textile exports can be broadly categorized into 2 large segments - apparel, which contributes nearly half the revenues, and non-apparel exports like yarn and fabrics, both natural and man-made. It is the former segment that brings higher margins to manufacturers. Indian Textile Industry is fragmented and unorganized, with 60% of firms in powerloom and the rest from handloom and mill sector. This is the unattractive part for Indian Textile industry because of global buyers who usually prefer less number of suppliers. Over the past 1 year, the significant change in India has been the higher value addition that the sector has achieved. The opportunities for Indian manufacturers are huge in ready-made garments. For instance, T-shirts made in India for $5 or less, are sold in American stores for $75 and more. India’s ready-made garments sector was stripped off its small scale industry status less than 3 years ago. As a result, textile firms were able to undertake massive capacity expansion drives over the past couple of years. The extension of the Textile Upgradation Funds Scheme (TUFS) will allow for further expansion. Currently the sector employs, directly or indirectly, 3.5 crore people. Industry sources reckon that nearly one crore additional employment can be generated over the next 2 years, with India stealing a march over China. The Indian counterpart has cheap labour but when it comes to productivity it lags behind China, Sri-Lanka and other Asian countries. The domestic market, too, is expected to grow, by nearly 10% over the next few years, on the strength of higher disposable incomes and a predominantly young market. Home textiles are among the most dynamic export segments in India’s textile industry. By focusing on the US market, India has become the USA’s leading foreign supplier of towels, and 1 of its top 3 foreign suppliers of cotton sheets. Its success in home textile exports stems largely from the efforts of a few dynamic companies. These companies have spurred by their global ambitions and buoyed by their export success, they are in the midst of implementing large expansion programmes.

Chinese holdup may thrust Indian exports

The impediment on exports of Chinese textile products to the US and the EU until ’08 could substantially push up Indian exports to these 2 destinations, according to the Union textile minister in a seminar. This may help India achieve the ambitious target of exporting $50bn worth of textile products by ’10. The minister stated that India could witness high growth potential if the opportunity due to Chinese embargo could be combined with the fashion and design expertise in India and decrease losses created as a outcome of late deliveries. Already the positive implication of the restriction have started showing with exports to the US jumping over 44% in January this year to $560m as compared to the identical period last year. In contrast, the growth of Chinese exports slowed down to 11% in January ’06 compared to over 70%, growth in the US and 33% in the EU in ’05. India’s per unit realization too grew over 11.4% in the last 1 year to touch $4.19/sq meter up from $3.77/sq meter. “This means that an Indian textile export is that of higher quality confirming that India is going up the value chain”.

Earning:   Approval pending.