India Ratings (Ind-Ra) has maintained a stable outlook for cotton textiles for the next financial year following steady input prices, healthy capacity utilisation and healthy domestic demand.
The agency has revised its cotton outlook to stable for FY18 from negative for FY17, in view of stable input prices, healthy capacity utilisation and steady domestic demand scenario.
It will emanate through fiscal incentives and implementation of Goods and Services Tax (GST) that will improve the industry's export competitiveness, Ind-Ra said.
Favourable trade agreements with the US and Europe will also lead to a significant increase in India's exports and a higher-than-expected domestic demand would be positive for the sector, it added.
The agency revised its outlook for synthetic textiles to stable for FY18 from negative for FY17.
Moreover, Ind-Ra said, the US' exit from the Trans-Pacific Partnership is likely to realign textile trade and investments towards the Indian subcontinent that were diverted to Vietnam over FY16-FY17.
The stable cotton outlook is in view of an increase in acreage, a rise in supply in the first quarter of FY18 (due to demonetisation) and a decline in global inventory assisting with a balanced supply, Ind-Ra said.
Ind-Ra expects operating profitability levels of Indian cotton ginners and exporters to moderate in FY18. Liquidity position of small players was acutely affected due to a surge in cotton prices in first half of FY17, followed by a challenging operating environment in the second half due to demonetisation, it added.
The cotton acreage is estimated to increase 10-15 per cent to nearly 120 million hectares in FY18, leading to increased production, the rating agency said.
Ind-Ra opined that textile companies would be able to de-leverage their balance sheets in FY18, mainly in the absence of major investments due to adequate capacities and pending uncertainty over the GST tax rates.
The next round of investment cycle is expected from FY19, it added.
Ind-Ra expects an improvement in the credit profiles of textile companies, including raw cotton players, driven by lower cotton inventories, limited capital investments and reduced borrowing costs.