High interest rate, wage cost and rising value of rupee against dollar has sent small textile companies into losses with big brands striving to save their declining bottom-lines, says a study.
The net profit of the top ten textile companies including Nahar Spinning Mills, Gokaldas, Raymonds, RSWM, Welspun, and DSCL Shriram has declined by 32 per cent in the quarter ending September this year. The small companies whose average revenues are in the range of Rs 20 crore to Rs 90 crore, have recorded 74 per cent decline in profit after tax, said the ASSOCHAM Eco Pulse (AEP) study.
It said besides strengthening of domestic currency, the high borrowing cost and huge wage expenses owing to stringent labour laws, have led to fast shrinking of the profit margins of these firms.
The study was based on the corporate results for second quarter announced by 10 big companies and 10 small companies in textiles and clothing sector. The small companies analysed include Celebrity Fashions, Ginni Filaments, Zodiac Clothing, and Vardhaman Acrylics.
The top-lines of the top ten textile majors grew by an average 12 per cent in Q2 of this year and those of mid-size companies grew by 9.4 per cent. Seven out of these twenty companies recorded decline in income in second quarter of current financial year as compared to Q2 of FY07.
As more than 50 per cent of textile and garments sales are made offshore, hardening of rupee against dollar by almost 12 per cent over last year has rendered the Indian textile industry uncompetitive in the international market, where it is facing tough competition from China, Bangladesh, Pakistan and Sri Lanka. Drop in exports suppressed the prices in domestic market, affecting income growth of the textile firms.
The impact of the rupee rise is more pronounced in case of mid-size textile companies as their collective income increased by only eight per cent, while the large ones registered 16 per cent growth. This was due to better price negotiating position of the big firms.
High operating cost by the textile industry, according to ASSOCHAM, is a major factor responsible for shrink in net earnings. The interest rates have been at a high of 12.75-13.25 per cent in the current fiscal so far, compared to 11-11.5 per cent last year.
Slowdown in the textile industry due to mounting pressure at the export component has not deterred the wage expenses. The salary cost is up by 25 per cent and 21 per cent for the large- and middle-size companies, respectively. The rigid labour laws of the country do not allow adjusting workforce according to the demand. The Contract Labour Law, 1970, restricts the textile units to outsource and appoint labour on contractual basis.
The effect of sharp rise in raw material cost is largely felt in case of the large-size textile companies, at times to the extent of 27 per cent. Of the ten top companies in the sector, seven recorded higher increase in raw material expenditure than sales growth. Four mid-size textile companies experienced a similar phenomenon.
While the small companies may have reduced production with lesser export demand, the big-size companies have not resorted to slash in production and rather opted to forego the profit margin by resorting to competitive pricing.
