While rising value of rupee against dollar has sent small textile companies into losses, big brands are striving with high interest, raw material and labour cost to save their declining bottom lines, says Mr. Venugopal N. Dhoot, President of the Chamber while releasing the study undertaken by the ASSOCHAM.
The ASSOCHAM Eco Pulse (AEP) study stated that 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 net profit of top ten textile companies including Nahar Spinning Mills, Gokaldas, Raymonds, RSWM, Welspun, DSCL Shriram, has declined by average 32 per cent in the quarter ending on September this year.
The small companies whose average revenues are in range of Rs.20 crore-Rs.90 crore, have recorded 74 per cent decline in profit after tax.
The AEP Study was carried by the Assocham Research Bureau 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 analyzed include Celebrity Fashions, Ginni Filaments, Zodiac Clothing, Vardhaman Acrylics etc.
The top lines of the top ten textile majors grew by 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 its 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 Rupee rise is more pronounced in case of mid-size textile companies as their collective income increased by only 8 per cent while the large ones registered 16 per cent growth. This can be explained by the better price negotiating position of the big firms.
High operating cost borne by the textile industry, according to ASSOCHAM is major factor responsible for shrink in net earnings.
The interest rates were at the high of 12.75-13.25 per cent in the current fiscal so far compared to 11-11.5 per cent last year.
Rise in interest cost borne by the textile companies was higher than the rise in sales. The borrowing cost of the big firms went up by whopping 45 per cent while the rise in sales was only 12 per cent.
Similarly, the small companies too witnessed higher jump in interest expenses at 17.5 per cent compare to only 9 per cent sales growth.
High interest rates also checked the growth of credit disbursement to the sector as according to the RBI data, the growth in non-food gross bank credit given to the textile sector declined from 39 per cent as on the period on August 17, 2006 declined to 28 per cent in this 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 work force 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 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 the similar phenomenon. The AEP has accorded the competitive pricing policy followed by the big and established textile and garments majors to this finding.
While the small companies may have reduced the 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.
