BY--

NEHA MOHTA-29ANKIT PUROHIT-32SHRIDHAR SHRIRAGHAVAN-39SHREYA SOOD-43PRASANTHI VELAMURI-46

Analysis of the Indian Textile Industry

TABLE OF CONTENTS. No Topic

1 INTRODUCTION2 OBJECTIVE OF THE STUDY3 MARKET SIZE AND STRUCTURE4 ECONOMIES OF SCALE5 SCOPE OF THE INDUSTRY6 FINANCIAL ANALYSIS

6.1) COST DRIVER6.2) COST STRUCTURE6.3) FINANCIAL RISK6.4) TAX RATES

7 PORTER FIVE FORCES8 SWOT ANALYSIS9 PESTLE ANALYSIS

10 VALUE CHAIN ANALYSIS11 PROFIT POOL ANALYSIS12 ROLE OF TECHNOLOGY13 INDUSTRY KPIs14 CAPITAL EXPENDITURE15 FDI IN TEXTILE INDUSTRY16 OPERATING ENVIRONMENT17 COMPENSATION18 PROBLEMS AND OPPORTUNITIES19 GOVERNMENT SUPPORT20 SOCIAL RESPONSIBILITY INITIATIES21 FUTURE OUTLOOK

1. INTRODUCTION

The textile industry in India traditionally after agriculture is the only industry that has generated huge employment for both skilled and unskilled labour in textiles. The textile industry continues to be the second largest employment generating sector in India offering direct employment to over 35 million in the country.

India is the second largest producer of fibre in the world and the major fibre produced is cotton. Other fibres produced in India include silk, jute, wool, and man-made fibres. 60% of the Indian textile Industry is cotton based.

2. OBJECTIVE OF THE STUDY

With this backdrop, the report on the textile industry shall study various aspects of the industry ranging from the market structure, operating environment such as government regulations, trade policies, the profit making abilities across the value chain and the functioning performance indicators to make an entrepreneur/incumbent aware of the attractiveness, arising trends and challenges in the industry.

3. MARKET SIZE AND STRUCTURE

A leading sector in the Indian economy, textiles contributes 14 per cent to industrial production, 4 per cent to the GDP and around 17 per cent to the total export earnings. It is, in fact, the largest foreign exchange earning sector in the country.

India accounts for 61 per cent of the global loomage , 22 per cent of the global spindleage , 12 per cent of the world's production of textile fibres and yarn & 25 per cent share in the total world trade of cotton yarn.

Market operators - The textile sector operates across a vast array of products offering yarns, fabrics and garments catered to the personal wear and homecare segments. Vardhman Textiles, Arvind Mills and Alok Industries are leaders in the textile space offering products from the yarn to garments section. Raymonds on the other hand is a leader in the fabric and garments sphere while Bombay Dyeing is a market leader in the home care segment.

28%

12%11%11%

9%

8%7%6%

5% 3%

Market Share Of Large Organised Players

Alok Vardhaman SKNL Arvind TridentWelspun BRFL RSWM Sutlej Mandhana

STRUCTURE

The industry comprises mostly of small-scale, non-integrated spinning, weaving, finishing, and apparel-making enterprises. Such a structure arose due to the policies on tax, labour and other regulations that favoured small-scale, labour-intensive enterprises, while discriminating against large-scale, capital-intensive operations.

SIZE

The size of India’s textile market in 2011 was US$ 89.0 billion and the market is expected to expand at a CAGR of 11 per cent over 2009–20. The total production value for 2015 is estimated to be at US$ 134 bn. and expected to reach US$ 220 bn. by 2020

Exports have been a core feature of India’s textile and apparel sector, a fact corroborated by trade figures. It stood at $33.2bn in FY 2012. Textile exports are expected to increase to $80bn in 2020 in the global market.

GEOGRAPHY WISE DISTRIBUTION OF THE INDUSTRY

HaryanaFactor Conditions Haryana has a well-established textile sector. The state produces textiles and RMG worth US$ 1billion. It has abundant availability of cotton and wool, as well as a large number of garment manufacturing units. It offers easy access to key buying centres such as Delhi and Gurgaon. The state also has a large labour pool with low labour costs at US$ 8 per month. Incentives Haryana Investment Promotion Board develops a customised set of incentives for projects in the textile sector of value above US$ 0.14 million. The Haryana Government is actively involved in developing conducive ecosystems for the textile sector. It has set up a textile cluster in Panipat, which is one of the largest textile clusters in India and is proactive in setting up textile-promoting SEZ’s and FEZ’s.

Andhra PradeshFactor conditionsAndhra Pradesh is one of the major exporters of textiles in the country. It has an abundant supply of raw materials and production facilities. It is one of the leading textile processing centers with over 100 units and produces 13 million metres of cotton cloth per annum. The state has good power infrastructure, it is the third largest power utility in the country with a total power generation of 10,273 MW. Incentives• 100 per cent reimbursement of stamp duty, transfer duty and registration fee on all textile units• All textile units are exempt from zoning regulations and conversion fees• Units are exempt from corporate tax in SEZs besides the tax on exports and imports• Special incentives for textile units on power tariffs, as per the new Industrial Policy• Incentive of US$ 110 per worker employed in textile parks• Encourages spinning mills with a capacity greater than 12,000 units • Textile parks of area greater than 25 acres inside the city and greater than 5 acres outside the city will be under urban land ceiling related exemptions

GujaratFactor ConditionsThe textile sector contributes 12 per cent to the total textile exports of the country. The state has a well developed textile machine industry and also various institutes for textile product design and development, like the National Institute of Fashion Technology (NIFT).Incentives• 20 per cent credit- linked subsidy for setting up power-looms• 5 per cent interest subsidy under TUF• Capital subsidy of 10 per cent in processing sector• Interest subsidy of 3 per cent p.a. to a new unit in the textile sector• Interest subsidy of 3 per cent p.a. on purchase of capital equipment under TUF

Tamil NaduFactor conditionsTamil Nadu has the largest cotton textile industry cluster in India which contributes to 39 per cent of the total production in the country. The country’s largest textile cluster, Tirupur, is also situated in Tamil Nadu. This cluster accounts for 90 percent of the country’s cotton knitwear exports. The state is emerging as a global sourcing hub for ready-made garments and hosts many global brands.IncentivesThe state offers tailor made packages for investment over US$ 62 million in fixed assets. It offers exemption on Entry Tax and Sales Tax on imports of manufacturing units.

There are capital subsidies and exemption in Electricity Tax to companies investing in fixed assets. Subsidies for new industrial units located in government industrial parks have been increased to 150 per cent.• Incentives for patent registration through a one-time reimbursement for the process• Encourages establishment of textile parks• Offers many weaver’s promotional incentives. E.g. Prizes for best design, setting-up of marketing associations for Weaver’s cooperative Societies

KeralaFactor ConditionsSpinning is the single largest industry in Kerala- hand looms contribute to 10 per cent of the total exports. Cotton yarn is the most popular textile product, followed by knitted garments and fabrics. Some textile-processing complex in Kerala offer walk-in-and manufacture environments.IncentivesSome of the key fiscal incentives offered by the Government of Kerala, for the textiles sector include:• Textile units eligible for a state investment subsidy of 15 per cent of fixed capital investment, up to a maximum of US$ 30,000• All investments exceeding US$ 11 million in this sector will be offered customised incentives except for tax-based incentives• All textile units set up in industrial parks will be exempt from stamp duties and registration fees• The Government provides grants for quality certifications from recognised institutes up to 50 per cent of the expenditure on obtaining the certification subject to a maximum of US$ 4,500.

The state is introducing power-looms in a phased manner and offers customised incentives for conversion to powerlooms. It also offers trainings to new workers in the handloom weaving segments.

4. ECONOMIES OF SCALE

Indian firms are typically smaller in scale when compared to their Chinese counterparts and there are fewer larger firms in India. For instance, on an average, Chinese firms have 1.5 times higher spinning capacity than those of India. Scale influences cost structure as it gives an opportunity to exploit economies of scale and an ability to attract customers with large orders. Firms must have managerial capabilities to design appropriate supply chains to manage this scale and also the workforce, especially in the case of garment manufacturing, which is order driven and hence requires full-time workforce even in lean seasons.

A crucial factor in achieving economies of scale is the incorporation of technology. By analysing the total TUFS disbursement during 2008 we found that the weaving industry accounted for only 7.7% and garment industry accounted for only 5% as against 34% of spinning industry. This indicates that the sectors have not undergone significant technology upgradation. Thus, the fabric industry and garment industry should undertake technology upgradation as well as achieve economies of scale to become cost competitive.

A further analysis behind the presence of scale across the value chain led to the following conclusion:Spinning Weaving Fabric

ProcessingGarments

Economies of Scale

Present Absent Absent Absent

Remarks Large capacity fragmented

Weak and unorganised

Some Large Players

Fragmented Consolidating

5. SCOPE OF THE INDUSTRY

An analysis of the trade basket showed that jute has only 1% share in the export basket with the majority consumed locally. We perceive this as an industry limited by market size and have therefore eliminated it from the study. Similarly, silk occupies a small share among the total Indian textile production value and thus we have eliminated the silk sector too from the study.

Thus we have limited the scope of this study to cotton, blended cotton and MMF based products as they form the major chunk of the Indian textile industry in terms of production and trade. The report would also entail a detailed study of all the processes in the value chain of the industry, which would include spinning, weaving, processing and manufacturing.

6. FINANCIAL ANALYSIS 6.1 COST DRIVERS

The following cost drivers have been identified for both the companies –

COST OF RAW MATERIAL - Cotton, the major raw material which goes into the production of textiles is procured in huge quantities and its availability directly impacts the sales and the costs incurred. Through vertical analysis, we determined that the cost of raw materials holds majority of the total sales. Hence we have selected the same as the cost driver.

DIRECT LABOUR HOURS - Since the Indian textile industry is labour intensive, direct labour hours have a major say in the costs incurred in this industry. Even though the industry is currently facing a shortage of skilled labour, semi-skilled labour is recruited in huge numbers as labour is available cheap at that level.

PRODUCTION MACHINE HOURS – The industry have been increasingly spending on adding high grade machinery into their asset portfolio. To overcome the problem of shortage of skilled labour, machine

hours are soon replacing labour hours and the companies have been able to do so because of higher revenues incurred due to increased demand for garments and also because of help from the government in the form of subsidies, etc

COST OF YARNS - Yarns are majorly procured by companies for spinning, weaving, etc of their final

Product. Hence, it is a major cost driver.

6.2 FINANCIAL COST STRUCTURE

The capital structure of this industry is highly debt financed. It is highly capital intensive with heavy machinery. Two companies Alok Industries and Arvind Mills have been chosen to represent the entire Indian textile industry as a whole.

**Please refer the Annexure 1

a) Alok Industries Ltd. is largely skewed towards Debt. About 80- 85 % of its total borrowings have been through Unsecured and Secured loans . With a pre-tax Kd(Cost of debt) of around 4% over Ke(Cost of equity) of 18% for the year 2012 , we can say that the company has taken a good decision of going for Debt as its source of borrowing has been cheaper. Over and above this , it has also got a huge tax benefit of ₹ 1234.7 Crs. But on the other hand Interest coverage has been reducing from 2.1 to 1.2 over the last 5 years. The WACC of Alok has more or less been the same about 7% .

b) Arvind Ltd.`s capital structure also has a major share coming from Loans. It is 65% debt-financed and 35% Equity-financed . The WACC of this company is around 16.9 which is much higher than that of Alok Ind. Ltd. It can be seen that EPS is maximized with a 60-40 ratio of D/E with a slightly high WACC. It has had a tax benefit equivalent to 55% of its earning .

Therefore through equity infusion and debt repayment companies can boost their net worth as well as improve the D/E ratio and there by improve the rating of the company. This may even result in a share price boost moving forward and by generating free cash flows thereby deleveraging companies.

An analysis of the players within the textile supply chain concludes that the Garmenting and Technical Textile segments are the most attractive in terms of financial returns.

6.3 FINANCIAL RISK

Risk and exposure of textile firms - Rating agency firm Fitch Ratings says cash losses in the Indian cotton textile sector are impairing the debt servicing capacity of manufacturers, making debt restructuring imminent. The agency also notes that while the Indian government's debt restructuring proposal for the textile sector will provide temporary relief from liquidity pressures, it will not stem deterioration in the capital structure of cotton textile companies, most of which are heavily-geared.

Systemic risk is a measure of volatility of a company`s share compared to the broad market. Here we have considered Sensex as the broad market for calculating the Systemic risk component or “Beta”. Both the companies have a beta greater than 1 that is high volatility in comparison to the broad market. ALOK IND.LTD has a lower beta compared Arvind Ltd. by 0.4 points. This can be attributed to the measures the company is taking to mitigate risk to the extent possible through Enterprise Risk Management (ERM) tools and techniques. Risk can be attributed to the normal industry risk, raw materials prices, fluctuations in Forex and other local market downturns. Exports account for close to 34% of the Company’s stand-alone sales .It has established strong relationships with leading global brands across the globe ; the exports are well diversified with 36% to the US, 29% in Asia, 18% in South America and 14% in Europe. Such diversification helps de-risk against local market downturns. On the other hand Arvind Ltd. has a Beta of 1.7.

6.4 TAX RATES

According to the Trade Facilitation Measures (Supplement To Foreign Trade Policy) a Special package of Rs. 325 crore has been allotted for the textiles sector. The government has rationalized the fiscal structure, exempt service tax, reduce interest rates on pre- and post-shipment credit and facilitate faster clearance of arrears on terminal excise duties and central sales tax.

Recognizing the Handloom sector as the most vulnerable segment of the Textile industry, Government has announced a Handloom Revival, Reform & Restructuring Package under which Rs.3884 crore was allocated for waiver of loans of handloom cooperatives, individual weavers, etc. and for interest subsidy, margin money and credit guarantee for fresh loans. Government also approved a debt restructuring package to help loss making textile mills, to be administered on a case by case basis by the banks within the prudential norms of the Reserve Bank of India.

a. EXCISE DUTY : Excise duties are indirect taxes levied by the government on manufacturing and export of goods. To incentivize exports in an environment of global slowdown, the Budget has exempted handmade

carpet and textile floor coverings of jute or coir from excise duty. Zero excise duty in addition to CENVAT route is also available to the cotton and manmade sector and

spun yarn at the yarn, fabric and garment stages. In case of cotton, there is zero duty at the fibre stage and in case of spun yarn, there will is a duty of 12%

at the fibre stage. Duty on branded garments was brought down to zero percent under the optional route from 3.5%

earlier.

These measures of reduced excise allow Indian players to compete against emerging competitors like Bangladesh.

b. CUSTOMS DUTY: Custom duties are indirect taxes levied on the import of goods. The Budget has enhanced the customs duty on raw silk from 5% to 15%. The union government on Thursday reduced the customs duty on textile machinery and parts to 5% from 7.5% in a bid to help the growth of the textiles sector. A reduction on customs duty for machinery and raw material allows reduce the cost for the industry players while the increase in silk products helps protect the domestic industry.

7 PORTERS FIVE FORCES MODEL

One of the worst hit sectors during the skyrocketing interest rate scenario in the late 90s and early 2000s, the debt-laden Indian textile industry has spun many turn-around stories since then. Aided by lower interest rates, restructuring packages from financial institutions and the recent dismantle of quotas, the sector is today well poised to capture growth opportunities. The textile sector employs nearly 35 m people and is the second highest employer in the country. Infact, it is estimated that one out of every six households in the country directly or indirectly depend on this sector. Here we analyse the sector's dynamics through Porter's five-factor model.

Bargaining power of customers (demand scenario)On the customer front, the bargaining power is medium due to countries like Bangladesh and China posing a potent threat to jeopardise India’s USP of cheap textiles. The bargaining power however is reducing lately due to increasing labour costs in China that are making it an unattractive supplier for the US and EU.

Bargaining power of suppliers (supply scenario)India is the third largest producer of cotton in the world after China and US and has the largest area under cultivation. Cotton, a key raw material in the textile and garment industry, accounts for about 30% of the fabric cost and 13% of the garment cost. India has an abundant supply of locally grown long staple cotton, which lends it a cost advantage in the home textile and apparels segments. Other countries, like China and Pakistan, have relatively lower supply of locally grown long staple cotton.

Moreover, low cotton prices due to a bumper cotton crop would enable India to lower its production cost and sustain pricing pressure. Further, efforts on improving the yield per hectare would ensure higher productivity and production, thereby providing the much-needed security of raw-material supply to textile producers. India is rich in traditional workers adept at value-adding tasks, which could give Indian companies significant margin advantage.

Threat of new entrantsIn the quota free regime, capacity expansion is the name of the game in the textile sector. Resultantly, smaller players who cannot venture into the global markets are flooding the domestic markets with excess supply, thus weakening the pricing scenario. Be it denim (Arvind Mills), home textiles (Welspun and Alok Industries) or branded apparels (Raymond), new capex and consolidation with international players is also not likely to safeguard margins for the larger players, unless they can tap a significant pie of the overseas markets.

Threat of substitutesLow cost producing countries like Pakistan and Bangladesh (labour cost 50% cheaper) are also posing a threat to India's exports demand. Infact, players like Arvind Mills have already started feeling the pinch

as overseas buyers have started shifting to 'alternative sources', thus impacting their incremental volume off-takes.

Competitive rivalryIndia's logistic disadvantage due to its geographical location can give it a major thumbs-down in global trade. The country is distant from major markets as compared to its global competitors like Mexico, Turkey and China, which are located in relatively close vicinity to major global markets of US, Europe and Japan. As a result, high cost of shipments and longer lead-time coupled with lack of infrastructure facility may prove to be major hindrances.

Establishment of 'Apparel Export Parks' and fiscal incentives in the recent budgets also indicate the government's resolve to aid the sector's growth and international competitiveness. As one can comprehend from the above analysis, the potential for the sector's growth are ample, but the trick lies in competing effectively against rivals. Consolidation of the industry and delivery of better quality at effective rates and minimum lead time would certainly help the players surmount all competitive pressures.

8 SWOT

STRENGTHS High operational efficiency in spinning

and weaving Low-cost skilled and unskilled labour Abundant raw materials Well-established network of related and

supporting industries Fully developed textile value chain

extending from fibre to fabric to garment exports

Strong backward integration Flexible in terms of production quantity

and lead time. Steadily diversified its raw material base

to include man-made fibres

WEAKNESS Shortage of skilled labour Highly Fragmented Industry. Industry is highly dependent on Cotton Lack of Technological Development that affect the

productivity and other activities in whole value chain. Infrastructural Bottlenecks and Efficiency such as,

Transaction Time at Ports and transportation Time. Lacking to generate Economies of Scale. Higher Indirect Taxes, Power and Interest Rates. Delay in delivering the goods at the right time.

OPPORTUNITIES Growing Export Market opportunity Market Growth potential due to Free

Trade Agreements Growing Domestic Market Huge demand for value added goods in

all major countries. Relocation from high cost economies. Large and relatively untapped domestic

market Large Indian Expatriate community.

Hence there is large demand for Indian Garments.

Custom and import duties are relatively low

THREATS Fluctuation in currency exchange rate Increasing competition from countries like Vietnam Increasing RM costs Reduced trade barriers and increased price pressures due

to US & EU from other competitor countries due to Trade agreements

Increased, cost-based competition from other countries Fluctuations in the demand in exports due to the

elimination of quota regime Higher borrowing cost which affects the profitability

9. PESTLE

POLITICAL (LEGAL) With a view to raise India's share in the global textiles trade to 10 per cent by 2015 (from the current

3 per cent), the Ministry of Textiles proposes 50 new textile parks. Set up under the Scheme for Integrated Textile Parks (SITP), this initiative will not only make the

industry cost competitive, but will also enhance manufacturing capacity in the sector. India and China have signed a memorandum of understanding (MoU) for promotion of exports of

Indian handicrafts India and Mauritius have signed a MoU to enhance the trade & economic relations by expanding

business and cooperation in the sphere of textiles and clothing including sericulture and silk and fashion industries.

ECONOMIC Rising incomes growing middle class have been the key demand drivers Strong global demand Changing demographics To surmount the huge skill gap of workforce, the Ministry of Textiles have launched an Integrated Skill

Development Schemes to impart employable skills in different segments. Foreign direct investment (FDI) of upto 100% is allowed in the textiles sector through the automative

route.

SOCIAL CULTURAL India has a young population, abundant skilled and unskilled labours It being a nation which is heavily dependent on agriculture, resources are abundant Rich culture and heritage has led to a high demand for the handloom and cottage industry produce Low wage rate-thus cheap labour available

TECHNOLOGY Shortage of power supply low and expensive R&D Lack of modernised equipment, largely labour intensive Technology Upgradation Fund Scheme (TUFS) to continue in 12th Plan with an investment target of Rs

151,000 crore (US$ 27.58 billion)

ENVIRONMENT On average, approximately 200 litres of water are required to produce l kg of textiles. The large

volumes of wastewater generated also contain a wide variety of chemicals, used throughout processing.

Energy crisis Acetic acid and formaldehyde are two major emissions of concern in textiles. water becomes full of chemical additives and is then expelled as wastewater; which in turn pollutes

the environment: by the effluent’s heat; by its increased pH;and because it’s saturated with dyes, de-

foamers, bleaches, detergents, optical brighteners, equalizers and many other chemicals used during the process.

10VALUE CHAIN ANALYSIS

VALUE ADDITION THROUGH THE VALUE CHAIN

India’s textile and apparel industry comprises mostly of small scale, non-integrated spinning, weaving, finishing, and apparel-making enterprises. Thus it is a highly fragmented industry.

The fundamental strength of this industry flows from its strong production base of a wide range of fibres/yarns from natural fibres like cotton, jute, silk and wool to synthetic/man-made fibres like polyester, viscose, nylon and acrylic. Unlike other major textile-producing countries, India’s textile industry is comprised mostly of small-scale, non-integrated spinning, weaving, finishing, and apparel-making enterprises. This unique industry structure is primarily a legacy of government policies that have promoted labour-intensive, small-scale operations and discriminated against larger-scale firms.

FIBRE SPINNING WEAVING/ KNITTING

BLEACHINGDYEING

PAINTING FINISHING

MAKE-UP

TEXTILE INDUSTRY VALUE CHAIN

11 PROFIT POOL ANALYSIS

The textile industry is going through interesting times. And the things that have made these times interesting are the ability of textile companies to tide over the difficulties in operating profitably.

Due to high operating costs, a number of textile companies are shifting their business strategies to the higher end of the textile value chain instead of focussing on the lower end of the value chain, where the dependence on raw materials such as raw cotton and yam is unnaturally enormous.

Being heavily governed by government policies, which are inexplicable and many a times unwarranted, textile companies, especially those involved in the manufacture and sale of yam and cotton, have shifted their focus to the sale of fabrics and garments, where returns are high and production costs relatively economical.

In the last three years, there has been a marked change in the business strategies of spinning companies as high operational costs have pulled down earnings of these companies. Many a spinning company is moving up the value chain in the textile industry in a bid to become a vertically integrated textile player.

Spinning companies like Vardhman Textiles, Loyal Textiles, KPR Mills, Suryajyoti Mills and Nahar Spinning Mills have diversified from the capital-intensive spinning business into the business of manufacturing fabrics in recent years.

Two factors have contributed to the shift in the business of spinning to the business of fabrics. One, high cost of power and two, high interest rates. In states such as Tamil Nadu and Andhra Pradesh where 50% of India’s spinning capacity is produced, only 30% power is supplied to spinning companies by the state electricity boards. Hence, spinning companies from these states have to buy the remaining 70% electricity at market rates, which can be as high as 18 per unit for spinning companies.

This is the reason why power cost forms 15% of the total expenditure of spinning companies. Apart from this, high interest burden has also eroded revenues of the companies in the last five years. These companies made losses on huge production, boosted by the Technology Upgradation Fund Scheme in times of subdued demand, putting pressure on the margins of spinning companies.

A comparative analysis of the financial performance of standalone spinning companies pitted against vertically integrated (healthy mix of fabrics and garment) textile companies showed that the net profit of vertically integrated companies has grown at a compounded annual growth rate (CAGR) of 35%, while standalone spinning companies have a CAGR of 28% in their net profits in the last five years.

This clearly shows that concentrated focus in the higher end of the value chain of a textile business is a lucrative strategy even in times of slowdown in the business. Hence, a conscious strategy to diversify into the fabric segment in the last three years has helped the spinning companies to increase their earnings.

Garmenting and fabric segments by their very nature of business demand require less capital in comparison with pure spinning businesses. Going ahead, increasing focus on fabrics and garments would help spinning companies to retain their margins and thus help them grow.

SPINNING SECTOR

We analysed the results of Ambika Spinning, a player solely into Spinning. We determined that it operated with a Net Profit Margin of 0.075. As we were unable to find the spinning sector profits of players who were operating across the value chain, we assumed 0.075 as the Net Profit Margin for these players and calculated the PAT.

COMPANIES REVENUE (Cr.) Net Profit Margin PAT (Cr.)

Ambika Spinning 398 0.075 30

Nahar Spinning 1711 0.075 128

Trident Textile 1683.7 0.075 126.28

Vardhman Textile 3012 0.075 226

WEAVING SECTOR

Alok Industries account for nearly 70% of the weaving market share in terms of sales and hence can be taken as a representative of this vertical. In the entire pool of companies under weaving, above 70% in terms of profits goes to Alok Industries.

Company Revenue (Cr.) PAT (Cr.) Net Profit Margin

Alok Industries (Weaving division) 7806 381 0.048

Thus we can perform an analysis of further segments in the value chain and deduce the attractive segments of the industry.

12 ROLE OF TECHNOLOGY

The Indian textile Industry is predominantly labour intensive comprising small-scale, non-integrated spinning, weaving, finishing, and apparel-making enterprises due to the policies on tax, labour and other regulations that favoured small-scale, labour-intensive enterprises, while discriminating against large-scale, capital-intensive operations. Not many textile units have adopted technologically advanced machinery in their companies.

Textile technology, once considered a handicraft, has become a highly sophisticated, scientific and engineering activity of new types of fibres and technologies. The field encompasses different areas of engineering such as mechanical, electrical, computer, chemical, instrumentation, electronic and structural engineering.

The Indian Textiles Industry has suffered from severe technology obsolescence and lack of economies of scale, which, in turn, had diluted its productivity, quality and cost effectiveness, despite distinctive advantages in raw material, knowledge base and skilled human resources. In order to address this The Technology Up gradation Fund Scheme (TUFS), the flagship scheme of Ministry of Textiles was launched on 01.04.1999.

13 INDUSTRY KPIS

Operational metrics

Customer Metrics Corporate Strategy Working Capital Management

Human Resource

Reduce Inventory cost

Improved Customer response time

Improve Stakeholder value

Improve cash management ,minimize borrowing

Reduce Worker turnover

Reduce Distribution cost

Improve customer retention & loyalty

Enhance market share, sales & Profit

Improve collections , reduce receivables

Training & Development

Reduce Lead time

Transaction satisfaction

Enhance innovativeness

Reduce material obsolescence

Improve capacity utilization

Product quality Improved ROI Improved Capital budgeting

14CAPITAL EXPENDITURE

With the high growth potential and growing demand of apparel in the domestic and Export markets, a heavy investment of around 3.2 lakh Cr has to be made in order to meet the requirements. Following chart gives an insight into the amount of investments required as per the value chain components

15 FDI IN TEXTILE INDUSTRY

Foreign direct investment (FDI) of up to 100% is allowed in the textiles sector through the automative route. The Ministry of Textiles has set up an FDI cell at the Economic Division to attract FDI in the sector.

India’s liberalisation of its foreign investment regulations, buoyant domestic demand for textiles, and strong export potential have led to growing foreign investment in the country. The country has become one of the fastest growing destinations for FDI inflows and collaboration. Foreign companies have been motivated to enter into collaborations with Indian firms by the increasing profits gains that can be made by producing brands in India and selling them into the Indian market. Indian companies, on the other hand, have been motivated by the scope for gaining technical and marketing expertise from foreign partners.

The textiles industry has attracted FDI worth US$ 956.97 million between April 2000 and March 2011, according to data released by the Department of Industrial Policy and Promotion (DIPP)

Ahmedabad-based textile company Arvind Ltd. has tied up with another major international brand, Geoffrey Beene, LLC for apparel and non-apparel products. Geoffrey Beene has licensed Arvind Retail Ltd. to manufacture and market its men's apparel and non-apparel products

India has the most liberal and transparent policies in Foreign Direct Investment (FDI) amongst emerging countries. Under the automatic route, 100 per cent FDI is allowed in the textile sector. FDI in sectors to the extent permitted under automatic route does not require any prior approval either by the Government of India or Reserve Bank of India (RBI)

16 OPERATING ENVIRONMENT

THE Ministry of Textiles is responsible for implementing the policy and regulatory frameworks of the industry. Several environment conventions have to be complied with. they are classified as product related, process related and waste management related. Under the product policy- Life Cycle Assessment (LCA) is the major criteria to evaluate the product’s impact on environment. Under the process policy, the sole aim is to make the production process sustainable. Similarly, under waste management, legislations regarding proper disposal of packages etc is taken. The government allows 100% FDI in textiles. The Technology Upgradation Fund Scheme(TUFS) attracts majority of investment( Rs. 2 Trillion till 2010). The Export Promotion Council overlooks the export activities along with the Department of Commerce and Ministry of Textiles. From 1st April 2000, Govt. Of India reduced several tariffs in different categories of fibers like- Manmade Fibers & Filament Yarns from 35% to 20%, Cotton Yarn from 25% to 20%, · Spun, Blended, and Woolen Yarn from 40% to 20 %. Also, Customs duty on Polyester Staple fibers is reduced from 10% to 7.5%. A host of incentives for the sector include:-

proposal to set up mega clusters; Rs 500-crore scheme for promotion and application of geo-textiles in the North-East; Rs 5,000-crore Venture Fund with SIDBI to enhance availability of equity to the MSME sector

17 COMPENSATION The textile workers in the entire South Asia are poorly paid and India leads the pack. Indian textile workers receive the second lowest wages in the world, despite India being one of the world's leading textile-exporting countries. Workers are paid an average wage of just $0.38 an hour. Even though FY 2013-14 saw an average salary hike of around 11% in textiles the wages for the shop floor workers remained low. The work shifts are scheduled on a 12-hour basis, called 1 ½ shifts. There is no use of overtime wage rates and this system leads to workers being underpaid for overtime by about 20%.

WORKER TURNOVER- The rising inability of factories to recruit, train and maintain their work force has quickly become one of the leading concerns of factories. Worker turnover is typically a range of 15% to 25% annually.

WAGE PAYMENT SYSTEM- The piece-rate wage payment system has been adopted as the preferred method of payment by many garment factories. Although this system may provide real productivity incentives and rewards to a cross-section of workers, it can create several barriers too. Eg. The first barrier created by the piece rate system is that the minimum wage is usually not guaranteed as a wage ‘floor’.

TRAINING/DEVELOPMENT HOURS AND COST The Textiles Industry in India provides direct employment to 35 million persons and indirect employment to another 47 million. The shortage of skilled labour has been ranked as the second most severe business constraint faced by the Indian textile industry. The emerging new technologies in weaving, spinning, processing, non-woven, knitting, etc., require knowledge-based skilled manpower at the shop floor. The missing links have been identified as - orientation towards modern technology, retraining, skill upgradation, managerial skill, entrepreneurship development, etc.

With an objective of capacity building of Institutions providing skill development & training in Textiles Sector, The Union Textiles Ministry launched a new Integrated Skill Development Scheme for the Textiles & Apparel Sector, including Jute & Handicrafts .

FUNDING PATTERN: Each of the projects will be funded to the extent of 75% of the cost of the project, with an overall ceiling of Rs.7500 for each trainee who successfully completes training. Successful candidates will be certified by an accredited agency. In those cases, where 50% of the trainees are employed/self-employed within 6 months of receiving training, a bonus will be given as an incentive to the Implementing Agency.

18 PROBLEMS AND OPPORTUNITIES IN THE INDUSTRY

MAJOR ISSUES Textile supply chains compete on low cost, high quality, accurate delivery and flexibility in variety and volume. Several challenges stand in the way of Indian firms before they can own a larger share of the global market. Major challenges faced by the industry apart from technology are as follows:

SCALE: There are few large firms in India, affecting the cost structure as well as ability to attract customers with large orders. Considering the size of the Indian economy there is a need of bigger firms that produce standard products in large volumes as well as small and mid-size firms producing large variety in small to mid-size batches.

SKILLS: There are three major aspects pertaining to this problem. Firstly, there is a paucity of technical manpower, secondly, Indian firms invest very little in training its existing workforce and the skills are limited to existing processes and lastly, there is an acute shortage of trained operators and supervisors in India. The real bottleneck to growth is going to be availability of skilled manpower.

CYCLE TIME: Cycle time reduction is strongly correlated with high first pass yield, high throughput times, low variability in process times, low WIP and consequently cost. Indian firms need a strong deployment of industrial engineering with particular emphasis on cellular manufacturing, JIT and statistical process control to reduce lead times on shop floors.

DOMESTIC MARKET: Firms are not taking advantage of the large domestic market in generating economies of scale to deliver cost advantage in export markets. This in the long run, will peril the export markets for domestic producers. In addition, high retail property prices and high channel margins in India will restrict growth of this market. Firms need to make their supply chain leaner in order to overcome these disadvantages.

OPPORTUNITIES

Government has liberalized the textiles sector and has taken several measure like TUFs, to promote large and integrated textile units

The future growth in textiles would be driven by organised players and their share is expected to increase from the present 5-6% to about 15-20% by 2020

Moreover, India’s cotton surplus situation is likely to be over in next 3- 4 years with rising domestic consumption and exports. As a result cotton prices are likely to move further and people by force would move towards blended fabrics.

India has unique position in global textile industry due to strong manufacturing base and is now emerging as a strong consumption base as well

India’s inherent strengths like a strong textile infrastructure along with high service capabilities makes it a preferred sourcing destination

The traditional players like China are getting stagnated and other major player Europe is on a decline. Other competing nations are at a far distance, thus clearly giving India a superior platform to grab additional market share

Indian textile industry is all set to witness almost 3 times growth in the next decade from usd 78 bn. To usd 220 bn

19 GOVERNMENT SUPPORT

ISSUES FOR INSTITUTIONAL SUPPORT: Industry is mainly driven by global competition and international trade regulations. However, few areas of policy weakness stand out – labour reforms, power availability and its quality, customs clearance and ship-ment operations from ports, credit for large scale investments that are needed for upgradation of technology, and development of manpower for the industry.

CLUSTER BASED APPROACH TO DEVELOPMENT The Government of India’s cluster development initiatives, involving technical assistance,subsidies for technology upgradation and marketing support, have strengthened the competitiveness of the SMEs (Small and Medium Enterprise) , which has also consolidated their position in the global value chain. A case in point is the initiative undertaken by the Textile Committee under the Ministry of Textiles, which has undertaken a cluster‐based programme for capacity building in textile and clothing SMEs in across 20 clusters in the country. Some key benefits of a cluster based approach for developing SMEs are:

Networking among enterprises Economies of scale Improved bargaining power Technology and skill upgradation Global visibility and being part of the value chain Easier access to finance Greater institutional support.

The concentration of textile firms in the form of clusters is to a natural advantage for adopting a cluster‐based development approach of the textile SME segment. International and domestic experience has proved that this approach has helped firms in attaining competitiveness, a requisite in today’s new market.

20SOCIAL RESPONSIBILITY INITIATIVES

There are different ways in which the textile industry fulfills its social responsibility towards the various stakeholders, including having ethical recruitment, remuneration, promotion and other policies, ensuring a safe working environment for the employees, ensuring a pollution-free production process ,presenting a true and fair picture of the financial condition to the investors, undertaking community development, ensuring purchase of environment-friendly supplies,having efficient waste disposal system,paying them a fair rate of dividend,etc.

Example:- Welspun has developed the concept of 5 Es – Enrichment of mind, enrichment of body, education, empathy, and empowerment of women.It regularly conducts workshops on Yoga, contribution towards the spread of education, etc. Similarly, Arvind Mills is known for establishing the Narottambhai Lalbhai Rural Development Fund and The Lalbhai Group Rural Development Fund for the benefit of the weaker sections. It also organizes nutritional programmes and food camps for rural people. In the near future, the textile industry plans to join hands with a global industry group called ‘Reducing the Impact of Textiles on Environment (RITE)’—to reduce the negative impact during the production of textiles and apparel throughout its supply chain.

21 FUTURE OUTLOOK

STRATEGIC PERSPECTIVE

Domestic Market: Firms are not taking advantage of the large domestic market in generating economies of scale to deliver cost advantage in export markets. This, in the long run, will peril the export markets for domestic producers. In addition, high retail property prices and high channel margins in India will restrict growth of this market. Firms need to make their supply chain leaner in order to overcome these disadvantages.

Addressing and proceeding ahead: Expectations are high, prospects are bright, but capitalising on the new emerging opportunities will be a challenge for textile companies. Some prerequisites to be included in the globally competing textile industry are: Imbibing global best practices Adopting rapidly changing technologies and efficient processes Innovation Networking and better supply chain management Ability to link up to global value chains