TEXTILE INDUSTRY – READYMADE GARMENTS (RMG)

Industry Overview

Textile Industry could broadly be classified into 3 segments, i.e. (i) Fabric Yarn, (ii) Man Made
Fibres & (iii) Readymade Garments (RMG). The focus of this primer is on the (iii) segment.

The RMG segment is involved in the garment manufacturing process with processed fabric as the
key input. The overall RMG market is currently at ~INR 5.1 trillion and is expected to grow at a 7-
8% in CY20 and 10-11% in the next five years due to favourable trends in demand drivers as
shown in Exhibit 1. GoI has boosted the growth in this segment with several export promotion
policies and has allowed 100% FDI under the automatic route.

Major Players

Company Name Product Line & Major End FY 19 Revenue Market Cap
Customers (Brands) (INR crore) (INR crore)
Arvind Ltd Products: Fabric, Apparel 6,436 962.61
Brands: Arrow, Calvin Klein
Raymond Ltd Products: Apparel (Suiting, 3,276 3,356.66
Shirting)
Brands: Park Avenue, Colors Plus*
Page Industries Ltd Products: Inner wear 2,852 24,595.52
Brands: Jockey, Speedo
Gokaldas Exports Ltd Products: Apparel 1,172 260.35
Brands: H&M, Nike, Reebok
Rupa & Co. Ltd Products: Inner wear, Thermal wear 1,103 1,542.78
Brands: Frontline, Euro
Note: The table provides an indicative list of brands served.
* - Raymond Ltd is vertically integrated & has its own brand (Raymond) in the retail market.

Key Trends
 RMG market to grow at 7-8% in CY20

Growth in this market is going to be led by domestic demand. The percentage share of domestic
demand in total market has been increasing in the last 5 years and this trend is expected to
continue for next 5 years. Domestic demand is forecasted to increase up to 84% of total demand
by CY4 Exhibit 2. The current economic slowdown could have a negative effect on growth though.

 Strong brand-manufacturer relationships helping Indian exports to the USA

USA’s overall RMG imports grew by 4% during Jan-Sep of 2019, whereas India’s exports to the
USA in the RMG market grew by 9%. The better growth from India is attributed to two reasons:
 USA-China trade war & strong brand-manufacturer relationships.

 T-shirts and denim in Men’s segment are high growth categories

Men’s wear market which is currently an ~INR 1.68 trillion market is expected to grow at 8-9%
CAGR over the next five years to ~INR 2.56 trillion. This growth would largely be influenced by
growth in t-shirts and denim segment. Global fashion awareness among the youth, and a
favourable young demographic in the country are the major contributors to this trend.

 Western wear & ethnic/fusion wear in Women’s segment have huge growth potential

Women’s wear market which is currently an ~INR 1.61 trillion market is expected to grow at 11-
12% CAGR for the next five years to ~INR 2.73 trillion. Rising number of working women, higher
discretionary spending, and increasing awareness of fashion trends are major factors contributing
to the growth of the market.

Key Information

Revenue Drivers Cost Drivers Key Metrics

Domestic & Exports  Raw material  EBITDA margin

 Staff expenses  Inventory turnover
 Sales to private labels
 Selling & distribution  Standard Allowed
 Sales to own labels
expenses Minute (SAM)
 Labour productivity
*Refer to Exhibit 3 for detailed
cost structure

Value Chain
Garment
Raw Inbound Outbound Marketing
manufactu
material logistics logistics & Sales
ring

RMGs use This includes Labour costs This includes Selling

processed transportatio are ~15-20% transportatio expenses
fabric as RM n & storage of the total n & storage contribute ~
which is costs of raw cost. of finished 20% to the
~50% of the material. goods. total cost.
total cost.
Porter’s Five Forces

Threat of Substitutes Bargaining Power - Suppliers

Threat of substitutes is
moderate
A company with diversified
product portfolio could mitigate
this threat. E.g., a woollen &
cotton apparel manufacturer
has lower threat than a cotton
apparel manufacturer.
Threat of New Entrants
Threat of new entrants is
moderate
High capital investments deter
new entrants
Incumbents experience
economies of scale
Strong government support led
to impressive growth, attracting
new entrants
Supplier power is moderate
Competitive Rivalry Switching costs are low
Limited supply of wool in India
Rivalry is strong increases supplier power
Fragmented market Synthetic inputs are of
Capital-intensive commoditized nature
industry Contracts with suppliers are of
Exit barriers are high, short-term nature
as it would be difficult
to divest specialized
assets
Bargaining Power - Buyers
Buyer power is moderate
No brand loyalty
Switching costs are low
Finished Goods are of
commoditized nature
Likelihood of backward
integration is minimal

Source: MarketLine

Challenges

 Free Trade Agreements (FTA) signed by competing countries with major import markets

Bangladesh’s exports to EU doubled from 2009 to 2016 owing to FTAs which allow duty-free
access. Similarly, China’s exports to Australia & Japan have been increasing thereby decreasing
India’s share in the RMG export market. India does not have FTAs in these markets.

 Fluctuations in exchange rates

Most exporters undertake hedging contracts to maintain a favourable operating margin but
currency depreciation in major importing markets has considerable implications for them.

Additional Reading Material (optional)

The following topics could be better understood by visiting the mentioned URLs:

 Industry overview: https://www.crisilresearch.com/#/industry/garments

Others
 M&A deals: https://www.ibef.org/download/Textiles-and-Apparel-November-2019.pdf
 Key metrics used in the industry: https://bit.ly/2T7mK3V
 Porter’s five forces: https://bit.ly/2TmqM7A
 Government initiatives: https://www.ibef.org/industry/textiles.aspx
Exhibits
Exhibit 1: Trends in demand drivers

Domestic Impact Exports Impact

Urbanization Abundance of cotton
Increasing retail penetration Strong relationships with USA brands
E-commerce Demand from USA due to trade war
Rising working population Lack of FTAs
Current economic slowdown Lower cost competitiveness
Source: Crisil Research

Exhibit 2: Share of domestic segment in the total RMG market

8,000

7,000

6,000

5,000

4,000

3,000

2,000

1,000

0
CY14 CY18 (P) CY19 (P) CY20 (P) CY21 (P) CY24 (P)

Domestic Exports

Source: Crisil Research

Exhibit 3: Detailed cost structure (as a % of Net Sales)

Other
expenses
30%

COGS
51%

Interest
3%
Depreciation
3%
Staff
expenses
14%

Source: Crisil Research

Sources for the report: Crisil Research & MarketLine