Textile

How to do Business Analysis of Textile Companies
 Published: 30-Mar-22
Modified: 22-Aug-22
1. Classification of textile companies
2. Key characteristics of business model of textile companies
3. Summary
The current article aims to highlight the key features of the business model of
textile companies. After reading the current article, an investor would know what
makes any textile company a strong or a weak player. She would understand the
features of fundamentally strong textile companies and how to find them.
Textile companies cover entities across the whole supply chain, which includes
growing the fibre, spinning it into yarn, preparation of the plain cloth (fabric) and
then manufacturing and sale of garments (apparel). Therefore, whenever an
investor comes across any textile company, then she should, first, assess which
segment of the textile value/supply chain, it belongs to.
Classification of textile companies

As discussed above, the textile sector is divided into different segments starting
from growing the fibre to the selling of readymade garments. Before analysing
any textile company, an investor needs to ascertain the role the company plays
in this value chain because companies in the different sections of the textile
sector face different business challenges.
1) Fibre growers/manufacturers:
Textile fibre is mainly divided into natural fibre and man-made fibre. Natural fibre
mainly consists of cotton; however, there are other kinds of natural fibre also like
hemp fibre, stinging nestled fibre, coffee ground fibre, pineapple fabric piñatex,
banana fibre, lotus fibre etc. Nevertheless in the natural fibre category, cotton is
the most widely used fibre in the world.
Textile industry risk analysis by VIS Credit Rating Company Limited, Pakistan,
January 2022 (click here), page 2:
The risk of substitution for cotton fibre is extremely low, as there is a natural lack
of an alternative raw material for the manufacture of textile products. However,
internationally developments have been made for more sustainable innovations
in the industry, that also provide alternatives to cotton fiber, e.g., Hemp fiber,
stinging nestled fiber, coffee ground fiber, pineapple fabric piñatex, banana fiber
and lotus fiber.
Manmade fibre is of two types: synthetic and cellulosic. Synthetic fibres are
primarily produced from petrochemicals and therefore are derivatives of crude oil.
They mainly constitute polyester staple fibre (PSF), acrylic staple fibre (ASF) and
nylon staple fibre (NSF). Cellulosic fibre is made from cellulose (wood) and
mainly constitutes viscose staple fibre (VSF). Among the manmade fibres,
polyester forms the major (about 80%) portion.
Rating Methodology for Manmade Yarn Manufacturing, CARE, December 2020

(click here), page 1:
Manmade fibres (MMF) can be broadly categorised under two heads- Synthetic
and Cellulosic. Under the Synthetic fibre segment, there are three types of major
fibres- polyester staple fibre (PSF), acrylic staple fibre (ASF) and nylon staple
fibre (NSF); whereas under Cellulosic, viscose staple fibre (VSF) constitutes the
major proportion…Polyester segment accounts for more than 80% of the total
MMF industry.
Further, natural and manmade fibres are mixed (blended) in different proportions
to give unique properties to the yarn and the cloth to be manufactured from it.
In India, cotton constitutes about 70% of yarn while the remaining comprises
primarily manmade fibre. This is in sharp contrast to global yarn production, in
which manmade fibre comprises 65%.
Rating methodology – textiles (spinning) by ICRA, March 2022 (click here), page
3:
Manmade fibre accounts for ~65% share in the world’s fibre consumption… In
contrast, cotton yarn accounts for nearly 70% of the total spun yarn production
in India.
Such a sharp difference in the pattern of yarn consumption in India vis-à-vis the
world is primarily due to govt. policies. The manmade fibre in India attracts higher
taxes than cotton, which has pushed the textile industry toward cotton. As a
result, cotton is the most available fibre in the Indian market.
Rating methodology – textiles (spinning) by ICRA, March 2022, page 3:
Due to abundant availability of cotton fibre and relatively higher indirect taxes on

the manmade one which impact export competitiveness, the Indian spinning
industry is largely skewed towards the cotton spinning and cotton yarn accounts
for ~70% of the total spun yarn production in the country
Cotton is an agricultural product, whose production depends on numerous
factors like minimum support price (MSP) by govt., weather, demand-supply in
India as well as international market etc. Cotton is mainly available in the market
during its harvest season (October-March) every year. Growing cotton is covered
under the agricultural sector instead of the textile sector.
Manmade fibres are primarily crude oil derivatives and their raw material are
produced by refineries. Their prices are dependent on crude oil prices and their
demand-supply situation in the Indian and international markets. Their raw
material is covered under the petrochemical industry instead of the textile
industry.
Therefore, the scope of the textile industry begins with the first step where
natural or manmade fibre is converted into threat i.e. yarn.
2) Spinning – yarn/thread makers:
Spinning involves making thread/yarn from fibre. Spinning mills buy cotton from
farmers/manmade fibre from refineries and convert it into thread. Depending
upon the requirement of customers, spinning mills get specialized in making
cotton yarn, manmade yarn or blended (mixed) yarn.
3) Knitting – fabric/cloth makers:
Fabric makers (knitters, weavers) buy yarn from spinning mills and convert it into
cloth. Fabric makers mainly sell the cloth to garment manufacturers as a B2B
sale who in turn, make readymade garments for selling in the market. However,
some fabric manufacturers sell their cloth directly to customers (B2C) by creating
their own brands and sales channel (e.g. Raymond) that meet the need of people
who do not buy readymade clothes and instead like to get it stitched from tailors.
4) Garmenting – apparel manufacturing and retailing:
The garments/apparel sector constitutes the final stage in the textile value chain
where the cloth prepared by knitters/weavers is converted into garments and sold
to customers. It includes two segments: apparel manufacturing which makes the
clothes and apparel retailing which sell the clothes in the shops. Some players do
exclusive apparel manufacturing or apparel retailing; however, some players do
both, manufacturing as well as retailing.
An investor would appreciate that companies in each part of the textile value
chain: spinning, knitting and garmenting face different business challenges and
therefore, it is essential for an investor to assess at what stage of the textile value
chain a company operates before she does its detailed analysis.
Further advised reading: How to analyse New Companies in Unknown

Industries?
Now, let us understand the key characteristics of textile companies and
understand how each business factor affects textile companies in different
segments of the value chain.
Key characteristics of business model of textile companies
1) Commodity nature of products:
In the value chain of the textile industry, spinning and knitting lead to commodity
products.
In the case of spinning, the characteristics of the yarn are specified by the fabric
maker in the terms of the type of fibre, count number, blend ratio etc. Once these
specifications are finalized then the yarn produced by one spinning mill is not
very different from the yarn produced by another spinning mill. Therefore, most of
the yarn produced in the industry is commodity yarn and the fabric maker can
source the yarn from any supplier who is willing to offer it at acceptable terms.
Rating methodology – textiles (spinning) by ICRA, March 2022 (click here), page
3:
The Indian spinning industry is highly fragmented…given the commoditized
nature of the product with limited product differentiation
Nevertheless, many spinners try to differentiate themselves by producing yarn,
which is of premium quality (i.e. of higher counts) as well as by producing value-
added yarn like compact yarn, slub yarn, mélange yarn etc.

However, companies manufacturing value-added yarn such as compact yarn,
slub yarn, mélange yarn etc. can command premium pricing and differentiate the
products to some extent.
CRISIL Ratings’ criteria for the cotton textiles industry, February 2021 (click
here), page 11:
A key factor distinguishing players in the commodity yarn market is their count
range…yarn realisations in the finer counts are generally less elastic than cotton
prices, and are substantially higher than those in coarser counts.
CRISIL Ratings takes a positive note of value addition in products,

including twisted yarn, dyed yarn, gassed and mercerised yarn, and compact
and melange yarn, as these fetch better realisations,
Similarly, the fabric segment is also dominated by commodity products. Once a
manufacturer provides the specification for the fibre in the terms of quality of
yarn, colour etc., then there is not much difference in the fabric produced by one
fabric manufacturer and another.
Rating methodology for entities in the textile industry – fabric making, ICRA, April
2020 (click here), page 2:
High level of fragmentation and commoditised nature of product results in high
competitive intensity
Nevertheless, a few players are able to differentiate themselves by way of
making fabric of premium quality with respect to specifications like grams per
square meter (GSM), picks per inch etc. and by producing fabric that needs less
processing before manufacturing garments.
CRISIL Ratings’ criteria for the cotton textiles industry, February 2021, page 11:
The fabric that needs least processing before it can be used in garmenting will

have the least price elasticity. This is applicable for woven and knitted fabrics.
A few fabric producers create a brand for their products by selling them directly to
customers (B2C) unlike sales to garment manufacturers (B2B). By creating a
brand in the B2C segment (e.g. Raymond Ltd), these fabric players are able to
differentiate their products and in turn, earn a better profit.
2020, page 4:
In addition to being sold to garment manufacturers, fabric is sold directly to
customers who prefer customised stitching over ready-made garments. Thus,
entities focusing on the B2C model, which are able to establish their brand…they
have higher profit margins compared to entities which are mostly present in
the unbranded commoditised segment.
Therefore, an investor would appreciate that in spinning and knitting (fabric
making) segments, most of the textile industry produces commoditised, and non-
differentiable products. Once the characteristics like type of fibre, blending,
counts etc. are finalised after that the product of one manufacturer is not very
different from the product of another.
Nevertheless, a few spinning mills and a few fabric producers are able to
differentiate their products and earn a high-profit margin.
In the case of the garment-making (apparel) segment, the products are not
commoditised. This is because, in the garment segment, an apparel
manufacturer can differentiate its products by its design abilities.
CRISIL Ratings’ criteria for the cotton textiles industry, February 2021, pages 11-
12:
Garmenting is the final stage of manufacturing in the textile industry. This

segment is generally not commoditised
Rating Methodology for Entities in the Textile Industry – Apparels, ICRA, April
differentiation can be achieved based on design capabilities
Design abilities form the basis of branding in the direct B2C apparel segment.
The garments/apparel segment has many brands both Indian and international at
almost every price point offering different choices to customers. Branded apparel
are able to earn a higher price than commoditised unbranded garments.
Further advised reading: How to do Business Analysis of a Company
2) Competitive intensity and pricing power:
The textile industry as a whole is highly fragmented with many small players
dominating each of the segments of the textile value chain i.e. spinning, fabric-
making and apparel. One of the major reasons for such composition of the textile
industry is govt. policies that promote small scale industries in the textile sector,
which is driven by the large employment generation in the textile sector.
Other major reasons for the highly fragmented nature of the textile industry are
very low entry barriers because the technology, raw material and labour are
easily available.
Rating methodology for textiles sector by India Ratings, August 2020 (click here),
page 2:
The industry is highly fragmented due to low-entry barriers and easy availability
of raw material and labour, leading to a large unorganised sector participant and
only a few large players.
An investor would appreciate that when an industry is fragmented with many
small players producing primarily commodity goods, then it would have very high
competition, which in turn would impact the pricing power of the players. As a
result, the majority of players in the textile industry do not have pricing power
over their customers.
Rating Methodology for Cotton Textile Manufacturing, CARE, November 2020

The entire cotton textile value chain is highly fragmented in nature having both
small and large players operating, thereby making the industry highly
competitive.
In the spinning segment, an investor would note that even though India has the
world’s second-largest (20%) spindle capacity at 50 million spindles; however,
still the average size of a spinning unit in the country is only about 30,000
spindles. As per ICRA, the industry is so fragmented that the largest spinning
player has only 3% of the industry capacity.
Rating methodology – textiles (spinning) by ICRA, March 2022, pages 1 & 3:
India has the second largest spinning capacity in the world after China, with
more than 50 million spindles, equivalent to ~20% of the global spun yarn
capacity.
Overall, the Indian spinning industry is highly fragmented, with the largest player
in the industry accounting for less than 3% of the overall installed capacity of the
country. As per ICRA’s estimates, installed capacities in the Indian spinning
sector average at ~30,000 spindles per unit
The manmade fibre mills segment is no different from cotton spinning mills. The
manmade fibre spinning mills segment is also fragmented.
Rating Methodology for Manmade Yarn Manufacturing, CARE, December 2020,

page 1:
The manmade yarn industry is relatively fragmented compared to the MMF

industry, with both small and large spinners operating in the segment.
An investor would appreciate that a large number of small spinning mills that
produce primarily commoditised products would have intense competition among
themselves and very low pricing power over their customers. This is because the
customer can easily replace yarn from one spinning mill with another mill.
The Indian spinning industry is highly fragmented…Moreover, given

the commoditized nature of the product with limited product differentiation,
the competitive intensity is high with minimal pricing power.
The fabric segment of the Indian textile industry is no different from the spinning
segment in terms of fragmentation of supply capacity. One of the reasons for the
presence of a largely unorganized sector in fabric manufacturing is the active
promotion of small scale industry by the govt. using incentivising policies.
2020, page 1:
Indian fabric industry is highly fragmented, dominated by a large number

of small-scale units in the unorganised sector due to the Government’s
earlier policy of promoting the small-scale sector through tax and fiscal
incentives and favourable labour policies.
As a result, in the fabric making segment, about 85% of the industry capacity is in
the unorganized sector.
2020, page 2:
The domestic fabric manufacturing industry is fragmented with ~85% of the fabric
production concentrated in the small-scale units in the unorganized sector.
The share of large mills which comprises integrated composite mills is only ~3-
4% in the total domestic fabric production (with balance accounted by the
handloom sector).
An investor would appreciate that a fragmented industry with a large number of
unorganized players producing commoditised and non-differentiable products
would have a very high competitive intensity and a very low pricing power over
their customers.
2020, page 2:
High level of fragmentation and commoditised nature of product results in high

competitive intensity and limited pricing power.
As discussed above, only a few players in the entire fabric making industry who
produce premium fabric and those who have created their own brands in the B2C
segment are able to enjoy some pricing power.
2020, page 2:
However, players in the branded and premium fabric segment, enjoy

some pricing flexibility and thereby better margins.
The garment/apparel segment of the textile industry was reserved only for small-
scale units by the Govt. of India in the past. As a result, this segment is also
highly fragmented in terms of market share owned by different suppliers.
2020, page 1:
Indian apparel manufacturing industry is highly fragmented and is characterised

by a large number of small-scale units. This in turn is attributable to the
Government’s earlier policy of reserving the sector for the small-scale units,
which had a specified cap on investments in plant and machinery (the sector was
fully de-reserved from CY2005).
The unorganized sector dominates the Indian apparel manufacturing as well as
retailing segment due to the easy availability of raw material (fabric), low cost of
production, and active govt. support for small scale industries in the sector.
This has led to a very high level of competition in the sector even though its
products are not commodities and many brands are present in the market.
Nevertheless, the majority of the players do not have pricing power.
2020, page 3:
As the apparel manufacturing and retailing sectors are fragmented and

unorganized, the competitive intensity is high and the pricing ability is restricted
to large retailers and strong apparel brands, besides niche boutique/ designer
stores. While given the low cost of production and sufficient availability of raw
material, a large chunk of domestic apparel requirement is met from domestic
manufacturing, apparel imports have also grown
An investor would note that only some of the established apparel brands have
some pricing power. Nevertheless, most brands have to follow the market in
terms of sales and match the discounts to their competitors.
The Indian branded apparel retail industry is intensely competitive, with the
presence of several large domestic and international brands, as well as smaller,
regional brands.
2020, page 1:
This is because even the branded apparel sector is highly competitive in India

with many domestic and international brands competing
An investor may note the example of Monte Carlo Fashions Ltd, which
highlighted to its investors that each brand; whether Indian or international,
whether strong or weak, has to adjust to the market and cannot survive without
discounts.
Conference call of Monte Carlo Fashions Ltd, May 2018, page 5:
Sandeep Jain: Sir I think in today’s scenario, we see all the leading brands not
only Indian brands but the international brands also, no brand can survive
without discounts so when it is end of season discount sale every brand be it
a strong brand or a weak brand has to adjust to the market conditions.
An investor may read out a detailed analysis of Monte Carlo Fashions Ltd in the
following article: Analysis: Monte Carlo Fashions Ltd
Therefore, from the above discussion, an investor would appreciate that almost
the entire textile value chain including spinning mills, fabric makers and apparel
manufacturers and retailers, is highly fragmented where many small players
providing non-differentiable products and services compete with each other. As a
result, most of the players do not have any pricing power.
The credit rating agency, ICRA stated that out of the hundreds of textile players
analysed by it, the average net profit margin (NPM) of spinning mills is about 1%
whereas the NPM of fabric and apparel players is about 3%.
Rating methodology – textiles (spinning) by ICRA, January 2018 (click here),

page 5:
For the spinning mills rated by ICRA, the average OPBDITA margins have
averaged ~12-13% with net profit margins of ~1% over the past five years.
Rating methodology for entities in the textile industry – fabric making, ICRA,
March 2018 (click here), page 5:
For the ~100 fabric entities rated by ICRA during the past five years, the average
OPBDITA margins have remained at ~11% with net profit margins of ~3%.
Rating Methodology for Entities in the Textile Industry – Apparels, ICRA, March
For more than 100 apparel manufacturers/exporters rated by ICRA, the
OPBDITA margins have averaged ~9% with net profit margins of ~3% over the
past five years.
Therefore, an investor would appreciate that the pricing power of the textile
players is low resulting in very nominal profit margins. Only a few players are
able to differentiate their products in a predominantly commoditised marketplace
and able to earn a high profit margin in the textile sector.
Further advised reading: How to do Financial Analysis of a Company
3) Impact of changing raw material prices:
While an investor analyses various companies in the textile value chain, then she
realizes that the raw material costs whether it is cotton or manmade fibre or the
fabric or garments form the largest portion of its operating costs.
Rating Methodology for Cotton Textile Manufacturing, CARE, November 2020,

page 1:
Raw material cost constitutes the largest portion of the total operational cost in
the entire cotton textile value chain.
Raw cotton constitutes about 60% of the operating costs of a spinning mill.
CRISIL Ratings’ criteria for the cotton textiles industry, May 2013 (click here),
page 3:
Raw cotton, the primary input for spinning units, constitutes about 60 per cent of
the units’ cost of production
As per the credit rating agency, ICRA, for the fabric manufacturers, yarn costs
are about 60% of their operating costs.
2020, page 5:
The fabric industry is raw material intensive with yarn cost accounting for

nearly 60% of the total operating costs
While analysing the apparel manufacturers, an investor notices that it is even
more raw-material intensive and the fabric costs consume about 60% of its
revenue.
2020, page 7:
apparel manufacturing industry is raw material and labour intensive with

the fabric (raw material) cost accounting for ~60% of the total revenues
Therefore, an investor would notice that almost the entire textile value chain is
very raw material intensive and any factor impacting the prices or availability of
its raw material would have a significant on the textile players.
Out of all the textile players, cotton spinning mills are most sensitive to the raw
material price and availability changes. This is because; first, cotton is primarily
available in the harvesting season (Oct. to March) and the cotton-spinning mills
have to stock cotton appropriately looking at their order book and expectations of
availability and prices of cotton during the non-harvest season. Therefore, the
cotton-spinning mills end up having a high level of inventory stocking during the
harvest season.

page 11:
Procurement of cotton by spinning mills start from October every year (with the
start of cotton harvesting) and continues till February – March. Spinning mills
usually procure cotton fibre stock during the harvesting season to ensure
optimisation of operations during the non-harvesting season.
Second, cotton prices are very volatile and depend upon good or bad weather,
the minimum support price (MSP) declared by the govt., demand and availability
of cotton fibre in the Indian as well as the international market because fibre is a
globally-traded commodity and domestic and international cotton prices move
together with a lag, expectations of next season’s crop as well as the prices of
manmade fibre, which also act as a substitute etc.

pages 1-2:
Prices of cotton fibre are highly volatile…Cotton, being an agricultural

commodity, its availability and price are dependent on the vagaries of
nature, international demand and supply, expectation of crop during the on-
going season and also in the next season, Minimum Support Price (MSP) fixed
by the Government, time of procurement, prices of polyester fibre/yarn and also
by the distance of the cotton spinning unit from the major cotton fibre sourcing
centre.
Rating Methodology for Cotton Textile Manufacturing, CARE, May 2013, page 3:
parity between domestic and international prices. Both prices move in tandem,

albeit with a brief time lag.
Third, as discussed earlier, cotton spinning mills have very low pricing power
over their customers because the spinning segment is highly fragmented and
produces mainly commodity products. Therefore, the ability of the spinning mills
to pass on increases in the input costs is very low.

page 5:
Fragmented and competitive nature of the industry and competition with the

manmade yarn fibre/ yarn (where prices are governed by crude oil prices) limits
the ability of cotton spinning companies to completely pass on any major
increase in the prices of raw cotton to their customers and can hence affect their
profitability margins.
The low pricing power of spinning mills and their inability to pass on the
increased costs to their customers was visible during FY2020 when the cotton
prices increased substantially without a proportionate increase in yarn prices. As
a result, the profit margins of most of the spinning mills declined in FY2020.
Spinning mills producing yarn from manmade fibre are comparatively less
exposed to inventory risk as they do not have to stock inventory for the non-
harvesting season like cotton-spinning mills. This is because manmade fibre is
available round the year. Nevertheless, manmade fibre spinning mills are
exposed to fluctuating raw material prices because the prices of manmade fibre
are linked to crude oil prices, which are very volatile.

page 3:
Manmade yarn manufacturers do not face seasonality risk like their cotton

counterparts. Despite that, inventory management plays a crucial role owing to
the linkage of the raw material with crude oil prices, etc… Owing to
the competitive nature of the industry, any adverse inventory fluctuation can
have an impact on the overall financial risk profile of a company.
page 2:
Being derivatives of crude oil, PSF prices are inherently volatile in nature,

making the margins of the spinners susceptible to adverse fluctuations in the
fibre prices.
Another factor that puts manmade-fibre (MMF) spinning mills in an adverse
situation is that the MMF production in India is highly concentrated because MMF
producers are very large corporates like Reliance group, Aditya Birla group etc.
whereas the MMF spinning mills are very small fragmented units. As a result, the
MMF spinning mills do not have any bargaining power against large MMF
suppliers.
Rating Methodology for Manmade Yarn Manufacturing, CARE, December 2019

The MMF capacity in India is highly organised with Reliance Industries, Indo
Rama Synthetics, Bombay Dyeing, and Grasim holding nearly 95% of the total
capacity. The manmade yarn industry, on the other hand, is relatively
fragmented compared to the MMF industry
Such composition of the MMF industry puts the manmade-fibre yarn producers in
a very disadvantaged position and the increasing cost of their raw material
becomes a factor that can push them out of business as well.
In a series of orders against Grasim Industries Ltd, which is the only producer of
viscose stable fibre (VSF) in India and has more than 85% market share, the
Competition Commission of India (CCI) found that the company was involved in
unfair business practices (read here: CCI order March 2020, CCI order August
2021).
CCI found that Grasim (opposite party 2, OP-2) was arbitrarily charging a higher
price to those customers who bought a higher quantity of VSF. It was also
charging a higher price to those mills who were selling VSF yarn in the domestic
market and a cheaper price to mills who were exporting VSF yarn in the export
market.
on many occasions, a buyer who purchases a larger quantity of VSF has to pay

a higher price as compared to another buyer who sources a lesser quantity from
OP-2.
OP-2 and its pricing policy failed to reasonably justify the reasons for higher net
prices recovered from domestic spinners as compared to other segments.
CCI also found that Grasim was keeping a tight check on the VSF utilization by
the spinning mills by forcing them to share their production data with Grasim in
order to block any attempt by its VSF customers to sell the VSF in the market by
trading or exporting it.
The act of OP-2, with respect to seeking from its customers’ details of VSF
bought and used for production of VSF yarn in the garb of offering discounts as a
condition for sale of VSF can be interpreted as not only preventing the resale of
VSF by its customers in India but also preventing the export of VSF by its
customers as a competitor to OP-2 in the export market. By seeking the details
of production and sale from its customer, OP-2, has been controlling the entire
market in its favour.
In one of the cases, CCI found that Grasim had charged such high prices to a
VSF spinner that it had to shut down its VSF spinning business because it could
not compete with other VSF spinners whom Grasim was selling VSF at a
cheaper price.
withdrawing/providing no discounts/credit notes to a VSF spinner and at the

same time selling VSF at discounted prices/adjusting through credit notes to
other domestic spinners who are all competitors in the downstream domestic
VSF yarn market. Owing to the said conduct, Informant No. 2 had to cease
production of VSF yarn/blended VSF yarn.
Due to these anti-competitive practices, CCI put a penalty of ₹301.61 cr on
Grasim Industries Ltd and ordered it to stop abusing its dominant position on
VSF spinners.
Therefore, an investor would appreciate that the relatively low bargaining power
of MMF spinners against MMF producers puts them in a seriously disadvantaged
position.
While analysing fabric and garment manufacturers, an investor would notice that
even though, raw material prices are a significant cost for them, still, the volatility
of their raw material prices i.e. yarn cost for fabric manufacturers and fabric cost
for apparel manufacturers does not have a very high impact on them. This is
because they manufacture goods only after getting confirmed ordered and they
price their products by factoring in the current ongoing prices of raw material
(yarn or fabric).

page 3:
For fabric and garment manufacturers, the susceptibility of margins to

fluctuations in the raw material prices remains low as the manufacturing is
generally order backed where prices are fixed as per the prevailing market price
of the raw material. Companies manufacturing against confirmed orders, fixing
the prices taking into account the prevailing raw material prices, and maintaining
raw material inventory position commensurate to their order book positions,
are insulated from the fluctuations in raw material prices.
An investor may read out a detailed analysis of Montel Carlo Fashions Ltd, in
which we observe that the company has always been able to pass on the
increase in its raw material costs by way of increasing the prices of its garments
to its customers.
Conference call, August 2021, page 3:
Sandeep Jain:…As far as your question about the high cotton prices are
concerned yes there have been increase in the cotton prices but fortunately, we
have been able to pass all the cost increase to our garments
Further advised reading: Analysis: Monte Carlo Fashions Ltd
Moreover, fabric and apparel manufacturers benefit from the year-round
availability of their raw materials i.e. yarn and fabric, unlike raw cotton. Therefore,
they do not have to stock a high raw material inventory like cotton-spinning mills,
which reduces their susceptibility to fluctuations in their raw material prices.
2020, page 5:
The susceptibility of a fabric-maker’s profitability to fluctuations in raw material

prices is generally low because of the limited yarn stocking by the units, as yarn
is readily available throughout the year.
Therefore, an investor would appreciate that due to high raw material costs, low
pricing power, and intense competition between fragmented-industry players,
companies in the textile industry are exposed to a significant risk of fluctuations
in the raw material prices. The risk is highest in the case of spinning mills.
However, the fabric and apparel manufacturers are able to mitigate raw material
prices risk by manufacturing goods only against confirmed orders where prices
are quoted after factoring in ongoing raw material prices.
Nevertheless, if fabric and apparel manufacturers accept long-period fixed price

orders then they may also get exposed to a higher raw-material price fluctuation
risk.
2020, page 5:
Nevertheless, the vulnerability to raw material price fluctuations increases if the

entity accepts long-term fixed price orders.
4) Cost competitiveness, economies of scale:
From the above discussion, an investor would remember that almost all the
segments of the textile industry are highly fragmented and dominated by small
players. Therefore, all the players face intense price-based competition. An
investor would appreciate that in such a situation, the players with the lowest cost
of production gain major competitive advantages.
As most of the products made by textile value chain are non-differentiable

commodities in nature, except garment-manufacturing; therefore, customers can
easily switch from products of one manufacturer to another. In such a market, the
lowest cost producers determine the market price and other players have to
match the prices (price-takers) irrespective of their cost structure.
Rating methodology for textiles sector by India Ratings, August 2020, page 8:
Cost position is an important factor in differentiating between companies as

domestic producers are the price takers for finished goods and profitability will
be highly dependent on the cost position.
In the textile segment, the raw material cost is the largest cost component, which
is not under the control of the players. As a result, the main method for the
players to reduce their costs is operating leverage i.e. economies of scale in
which companies increase their manufacturing capacities. As a result, the fixed
costs get spread over a larger volume of production and per-unit cost of
production declines.
Rating Methodology for Cotton Textile Manufacturing, CARE, September 2018

The cotton spinning industry is characterized by cyclicality, fragmentation and
high capital intensity. Raw material cost forms a major component of cost and
players operate at very low margins. Economies of scale and level of integration
are the key to profitable operations.
As a result, small players in the textile value chain are at a competitive
disadvantage and are highly vulnerable during economic downturns.
large players are likely to have more stable market and customer bases,
whereas small players would be more vulnerable to competition and raw
material price volatility even when the demand is stable.
In the spinning segment, it is essential to have a large spindle capacity. If a mill
has a smaller spindle capacity than the industry average of 28,000 spindles, then
the mill would find it difficult to be cost-efficient and would be at a competitive
disadvantage.
Rating methodology – textiles (spinning) by ICRA, September 2015 (click here),

page 1:
During the last 15 years, the average size of the spinning unit in India has
increased from ~24000 spindles to ~28000 spindles. Companies below this
average unit size may find it difficult to have a competitive cost structure in the
commoditized yarn market, unless the capacity is recently added, as it will have
a better level of modernization.
Similarly, in the fabric-making segment as well, having a lower cost structure by
way of economies of scale is essential because of high competition in the
commoditised market.
2020, page 2:
Given the intense competition and limited product differentiation, larger

capacities in fabric manufacturing offer benefits of economies of scale, thereby
resulting in a better cost structure.
In the apparel manufacturing and retailing section as well, the cost efficiencies
developed by a large size are essential to support profit margins.
2020, page 3:
a large revenue base leads to economies of scale in terms of cost efficiencies in

procurement and administrative functions, thereby supporting the margins of the
retailer
Moreover, as a garment manufacturer grows big, then it is able to sell directly to
big brands and gain large orders offering higher profit margins, which brings
strength to its business model.

page 4:
For the garment manufacturers, apart from cost advantage, large capacities

allow the mills to deal directly with the large domestic or international end-
customers rather than selling the products through dealers/ distributors.
Moreover, an investor would appreciate that established international brands
take a long time to approve vendors due to a focus on maintaining the
consistency in the quality of their products. As a result, a long approval process
by international brands becomes an entry barrier for new entrants. As a result, a
textile company having economies of scale and catering directly to big brands
seems to have many competitive advantages.
companies supplying to international brands require a long lead time for new
vendor approval, thereby creating an entry barrier for new players.
Therefore, an investor would appreciate that in the entire textile value chain
whether it is spinning, fabric or apparel manufacturing, due to intense competition
and almost non-differentiable products, companies have to focus on lowering
their cost of production and large capacities with economies of scale help a lot to
achieve it. Smaller players are at a competitive disadvantage even during times
when demand is stable.
large players are likely to have more stable market and customer bases,
whereas small players would be more vulnerable to competition and raw
material price volatility even when the demand is stable.
Further advised reading: Credit Rating Reports: A Complete Guide for Stock
Investors
5) Capital intensive nature of operations:
The textile industry is a capital intensive sector, which needs large capital both
for installing plants & machinery as well as for managing working capital due to
the raw-material intensive nature of the business.

page 6:
Owing to the capital intensive nature of business, companies having operations

in the industry typically have high reliance on external debt to fund their fixed
capital expenditure and working capital requirements.
Out of all the segments of the textile value chain, spinning is the most capital
intensive; both from the perspective of fixed capital (manufacturing plant) as well
as working capital (inventory and receivables).
The cotton yarn spinning industry is highly capital intensive, faces acute

cyclicality, has extremely fragmented capacities, and is intensely competitive on
account of the commoditised nature of the product.
Given the fixed capital as well as working capital-intensive nature of the spinning

business, the funding requirements are typically high in the spinning sector.
As per the estimates by the credit rating agency, ICRA, a spinning plant with an
industry-average size of about 25,000 spindles needs about ₹90-100 cr for
installation and produces a revenue of about ₹90-110 cr indicating a fixed asset
turnover ratio of 1, which is low in comparison to other manufacturing industries.
Spinning is a highly capital-intensive industry requiring significant investments in

plant and machinery. A typical spinning plant with ~25,000 spindles involves a
capital outlay of ~Rs. 90 to 100 crore – depending on land cost, degree of
automation and nature of expansion, i.e. greenfield or brownfield. A spinning unit
of this scale has the potential to generate revenues of ~Rs. 90 to 110 crore,
depending on the fibre usage and yarn count being produced by the mill.
Further advised reading: Asset Turnover Ratio: A Complete Guide for
Investors
An investor would remember from the above discussion that in India, almost 70%
of the yarn spinning units use cotton. Cotton is an agricultural commodity, which
is harvested from October to March. Spinning mills have to buy most of their
cotton during the early part of this harvesting season because the best cotton is
available only during the start of the season.
While cotton arrivals are spread over a six-month period from October to
March, quality cotton is usually available in the first few months.
Moreover, during the non-harvesting months, April to September, the availability
of cotton is lower and additionally, the cotton prices start reflecting the
expectations of the cotton crop in the next harvesting season. Therefore, the
quality, availability and price of cotton become uncertain during the non-
harvesting season.
volatility in cotton fibre prices after the harvest season can be driven by

the estimates of crop production in the next season
As a result, cotton companies prefer to stock cotton during the harvesting season
as per their order estimates. In fact, spinning companies, which can procure a
large amount of cotton are at an advantage as they can maintain the quality of
their yarn

page 2:
The companies which are capable of procuring large quantities of similar quality
cotton fibre are looked at favourably as it enables them to maintain uniformity in
the quality of yarn manufactured.
The practice of buying a large amount of cotton during the harvesting season
leads to a large requirement of inventory by spinning mills, which makes their
operations working capital intensive. In addition, it also puts them at the risk of
inventory losses if the prices of cotton decline later on.

page 3:
Spinning mills usually procure cotton fibre stock during the harvesting season
to ensure optimisation of operations during the non-harvesting season. This,
however, exposes the players to adverse fluctuations in the raw material prices.
Any significant decline in the prices of the fibre, especially for the entities having
excess inventory on their books, can lead to inventory losses.
In fact, in the past during FY2012, cotton prices did decline sharply and most of
the spinning mills faced inventory losses. As a result, the cotton mills started
cutting down on their inventory levels and reduced it to about 2-3 months of
inventory FY2017 onwards from earlier levels of about 6 months of inventory.
CRISIL Ratings’ criteria for the cotton textiles industry, February 2018 (click
here), page 5:
After the inventory losses incurred in fiscal 2012, cotton spinners are cautious on
stocking cotton for long periods. Thus, most have shifted to a leaner inventory
cycle of 2-3 months in fiscal 2017, as against the earlier norm of 6 months.
In comparison, the working capital intensity of spinning mills based on manmade
fibre is lower than cotton-spinning mills because manmade fibre is available
round the year without any seasonality. As a result, manmade fibre-spinning mills
do not need to do excess stocking. On average, manmade fibre spinning mills
maintain an inventory of 1-months as compared to an inventory of 3-months for
cotton-spinning mills.
fiscal year-end inventory levels average close to ~three months for cotton-based
spinners and typically stand at ~1 month (at year-ends) for mills based on
manmade fibre.
Further advised reading: Inventory Turnover Ratio: A Complete Guide
Therefore, an investor would notice that the spinning mills segment is highly
capital intensive both from the perspective of fixed capital as well as working
capital.
When an investor looks at the fabric making segment, then she notices that
fabric manufacturing is also capital intensive and needs significant investment in
plant and machinery as well as working capital.
2020, page 7:
Given the fixed capital as well as working capital-intensive nature of the fabric-

making business, funding requirements are typically high in the sector.
As per ICRA, a fabric-making unit of about 100 looms needs an investment of
about ₹70-90 cr and produces a revenue of about ₹100-150 cr indicating an
asset turnover of about 1.5 to 1.7, which is low considering other manufacturing
industries.
2020, page 1:
Fabric manufacturing is somewhat capital intensive and requires significant

investment in plant and machinery. A typical modern fabric-manufacturing
(weaving) unit with ~100 looms will have a capital cost of ~Rs. 70 crore to ~Rs.
90 crore, depending on the nature of expansion, i.e. greenfield or brownfield. The
high fixed capital intensity is also reflected in the operating income/gross block,
which typically remains at ~1.5-1.7 times for fabric manufacturers. In addition,
fabric manufacturing operations are working capital intensive.
A fabric-making business is working capital intensive because it needs to
maintain an inventory of about 2.5-3 months and additionally receivables of about
1.5-2 months are stuck with customers at any point in time indicating a significant
requirement of money for working capital.
2020, page 6:
Typically, the inventory holding period for fabric-manufacturing entities averages

~2.5-3 months
receivables position and the turnover period, which typically remains ~1.5 to 2

months for fabric-making entities
On the contrary, when an investor analyses the apparel segment, then she
notices that both apparel manufacturing, as well as apparel retailing, are not
capital intensive. In fact, they are labour intensive operations that need a
significant number of people and a large amount of raw material to manufacture
and sell clothes.
Garment manufacturing, on the other hand, is not as capital intensive as yarn

spinning;
2020, page 7:
apparel manufacturing industry is raw material and labour intensive with the

fabric (raw material) cost accounting for ~60% of the total revenues
and manpower cost accounting for ~8~9% of the total revenues.
Therefore, an investor would appreciate that even though the apparel business is
not fixed capital intensive (manufacturing plants); still, it is highly working capital
intensive because apparel manufacturers, as well as retailers, need to keep a
large amount of inventory.
2020, page 5:
The apparel industry is working capital intensive, primarily on account of the high

inventory levels.
An apparel manufacturer needs to keep a large amount of inventory as it has a
long manufacturing cycle. Apart from the usual need of keeping the required
amount of fabric for uninterrupted operations and work-in-progress, the apparel
units need to keep a large stock of garments of different designs, colours, sizes
(SKUs: stock keeping units) in their warehouses so that they may supply to the
retail shops as and when needed. This makes apparel manufacturing an
inventory-intensive business.
2020, page 5:
The inventory levels for the entities involved in apparel manufacturing are on

account of the long manufacturing cycle, which involves multiple processing
stages, starting from order-backed fabric stocking, processing and stitching to
finished apparels in transit to port/customers or awaiting shipment, pending the
completion of the entire lot size.
The apparel retailers have to keep a large amount of stock with different designs
in the shop and in the store to meet changing customer expectations.
2020, page 5:
For an apparel retailer, the inventory is because of the requirement to stock

apparels for multiple designs, colours and sizes in the stores, which typically
averages ~three to four months of store sales, stock apparels in warehouses to
ensure good fill rates in the stores and inventory on account of season leftovers.
The inventory requirements of the apparel company increase further in case, it
has both manufacturing and retailing divisions instead of only manufacturing or
retailing.
2020, page 5:
For an apparel retailer having in-house apparel manufacturing, the inventory

levels are even higher and thus pose higher working capital requirements
compared to entities which are involved in only manufacturing/ retailing.
An apparel manufacturer/retailer usually keep an inventory of about 100 days
and in addition have receivables outstanding of about 65 days of sales, which
makes their business working-capital intensive.
2018, pages 5 & 7:
On an average, for the last five years, for more than 100 apparel entities
(manufacturers and apparel retailers) rated by ICRA, the overall inventory levels
have remained close to ~100 days.
receivables position, which on an average has remained at ~65 days for more

than 100 entities rated by ICRA
Further advised reading: Receivable Days: A Complete Guide
Apparel companies follow different business models to sell their garments to end
customers i.e. multi-brand outlets (MBO), and exclusive brand outlets (EBO) that
can either be company-owned or franchise-owned. Each of these models has
different fixed and working capital requirements.
From a fixed-capital perspective, company-owned EBOs are the most expensive

because the company has to spend all the money on owning/leasing the shop, its
interiors, staff and utilities. However, in the case of franchise-owned EBOs and
MBOs, the company does not need to spend these costs and the store owners
make these spending. Nevertheless, an investor needs to note that franchise-
owned EBOs may demand a minimum guaranteed return on their investment,
which nullifies a lot of the gains from savings in the capital expenditure.
2018, page 3:
In contrast to the owned-EBO distribution model, entities retailing through MBOs

and franchisee-managed EBOs require limited fixed capital investments, in-store
interiors and fixtures besides limited fixed overheads such as rentals, employee
salaries, electricity charges etc. They are accordingly able to withstand
downturns better, scale up easily during demand upturns and also command
higher returns on investment. However, if the franchisee-managed EBOs have
an arrangement of minimum guaranteed returns, the said benefits get offset to a
large extent.
From the working-capital perspective, the company-owned EBOs are most
capital-intensive because the garments until sold to the end customers remain an
inventory of the company. On the contrary, in the case of MBOs and franchise-
owned EBOs, the company sells the garments to the shop under the sale-or-
return (SOR) or outright sale model, which reduces its obligations for the unsold
inventory significantly.
2020, page 6:
When the apparels are retailed through entity-managed EBOs, the apparel
inventory remains with the entity till it is sold to the final customers. However, in
case of retailing through distribution partners, i.e. MBOs and franchisee-
managed EBOs, the entity enters into either/or mix of the sale or return (SOR)
model or an outright sale model with their distribution partners.
In the sale or return (SOR) model, all the unsold inventory at the end of the
season is taken back by the company. However, in the outright sale model, the
company’s risk of unsold inventory is eliminated as there is no provision for the
return of unsold garments to the company. However, in such situations, the
shops ask for a longer credit period to compensate for the higher inventory risk
undertaken by them.
2020, page 6:
In some cases under the SOR model, the sale is recognised when the entity
transfers the inventory to the channel partner, and the unsold inventory with the
channel partners at the end of the season is taken back by the entity and is
reflected as sales returns.
In the outright sale model, the apparels once sold to the channel partners
are not taken back. High proportion of sales on an outright sale basis keeps
the inventory levels under control as there are no unexpected returns at the end
of the season; however, the outright sale model is analysed for the pace of
debtor collection, as sometimes, the entities tend to extend a longer credit
period, if the sales at the end of channel partner are slow.
Nevertheless, an investor would appreciate that the garment designs become out
of fashion very soon and therefore, it is difficult to sell garments from the previous
season. As a result, the unsold garments lose their value fast. Therefore,
inventory management is very critical for apparel manufacturers and retailers.
2020, page 5:
Given the fast-changing fashion trends, apparels can face fast

obsolescence and witness a sharp decline in their realisable value, if not sold
within the marketing season they were manufactured for. Accordingly, inventory
management is most critical for the profitability of an apparel retailer.
Further advised reading: Operating Performance Analysis: A Simple &
Complete Guide
Companies need to run aggressive end-of-season sales to get rid of unsold
inventory, many times at steep discounts. Therefore, at times, even under the
outright sale model, the shops may request the company to share discounts as
the monetary loss due to discount sales and unsold inventory can be huge.
2020, page 6:
ICRA also notes that in the case of the outright sale model, large unsold
inventories at the MBOs/franchise managed the EBOs can impact the future
sales of the entity and thus the policy on inventory liquidation through discount
sharing with channel partners is also compared with other players.
Therefore, an investor would appreciate that in the textile value chain, the
spinning segment is the most fixed-capital intensive, and fabric making is
somewhat fixed-capital intensive. However, garment manufacturing is not much
fixed-capital intensive instead it is a more labour-intensive business.
From a working capital perspective, both spinning and fabric-making are working
capital intensive; however, garment manufacturing and retailing are much more
working-capital intensive in comparison. In addition, the risk of inventory
obsolescence is also highest in the garment/apparel business.
An investor would also appreciate that the textile industry needs regular
modernization of plants & machinery to keep them efficient. Modernization itself
adds to the capital-intensive nature of textile mills.
Modernising a textile unit is fairly capital intensive, and in general, the industry
has lagged behind other cotton exporting nations in this respect; only a few
financially strong companies resort to continuous modernisation.
Another factor that makes textile companies capital intensive is their high power
requirements. Spinning mills are the most power-intensive segment of the textile
value chain. For a spinning mill, power costs are about 10% of revenue.
Rating Methodology for Cotton Textile Manufacturing, CARE, September 2018,

page 2:
Power cost also forms a fair component of cost (about 10% of sales)
Many times, to ensure uninterrupted and good power supply, textile companies
install captive power plants, which increases the capital intensiveness of their
business.

page 2:
captive generation have an assured and uninterrupted supply of power.

However, the same increases their capex requirement.
In order to reduce their power requirements, textile companies go for
modernization of plants as technologically new plants are power-efficient.
However, as discussed above modernization of plants is also a capital-intensive
activity.
Moreover, an investor would also appreciate that textile operations, especially

garment manufacturing, are labour intensive. As per CRISIL, labour cost forms
about 6% to 14% of operating costs for textile companies.
CRISIL Ratings’ criteria for the cotton textiles industry, May 2013, page 3:
labour costs vary from 6 per cent to 14 per cent among CRISIL-rated companies
Labour intensive operations expose textile companies to problems like strikes,
labour unrest etc., which force companies to have multiple manufacturing plants
so that labour problems at one plant may not affect the tight delivery schedules of
customers.
2020, page 3:
However, given the labour intensity of the sector, large units can also face
challenges related to manpower issues, such as strikes, labour unrests etc.
In order to reduce the dependence on labour, usually, textile companies go for
modernization of plants because the new machines with better technology are
more automated and reduce the dependence on labour.

page 3:
mills having higher level of modernisation, have lesser reliance on labour and
are viewed favourably
However, as discussed above, the modernization of textile units is a capital-
intensive exercise.
Therefore, an investor would appreciate that installing, running, maintaining and

modernising textile units is a capital intensive activity. As a result, it may seem
that only deep-pocketed entities would be able to enter this sector. However, an
investor would also note that the textile sector is one of the largest employers in
India, second only to agriculture. Therefore, governments, both centre and state,
support the creation, maintenance and modernisation of textile mills via their
policy and fiscal incentives.

page 5:
Government of India provides various fiscal incentives [Amended Technology

Upgradation Fund Scheme (TUFFS), Scheme for Integrated Textile Parks
(SITP), Rebate of State and Central Taxes and Levies (RoSCTL), etc.] to
companies operating in the textile value chain. These incentives constitute a
major portion of the profitability margins of the companies and are looked at
closely. In addition to that, in order to promote investment, certain State
governments also provide fiscal incentives in the form of capital or interest
subsidy to players setting up new textile units or undertaking modernisation at
their existing units.
In fact, despite being a capital intensive sector, due to the support received from
the govt. in the form of fiscal incentives and subsidies, textile companies routinely
go for modernization and capacity expansions.
2020, page 9:
Being capital intensive and given the availability of various fiscal incentives for

capital investments, capacity expansion has been a regular feature for industry
participants.
In the apparel manufacturing segment, companies get significant incentives from
govt. like subsidies to expand capacities.
2020, page 8:
apparel manufacturers continue to have access to capital subsidies for eligible
benchmarked machinery at a higher rate of 15% (with a cap of Rs. 30 crore)
under TUFS, vis-à-vis 10% under the earlier scheme.
Therefore, an investor would appreciate that despite being a capital intensive
sector, even the small-scale textile players have added and modernised
capacities because the govt. has supported them by way of various incentives
and subsidies.
Going ahead, an investor should always keep in mind the capital-intensive nature
of the textile business and the role of govt. incentives whenever she analyses
any textile company. Any reduction in the govt. incentives may impact the
financial position of the companies and their ability to do capital expenditure.
6) Cyclicity and seasonality in the textile industry:
An investor would appreciate that the demand in the textile sector is linked to the
macroeconomic conditions in the country. This is because the purchase of
fabric/garments is linked to consumer confidence, spending power and
discretion. As a result, the demand for textile products undergoes cyclical
changes in line with the general economic cycles (boom and bust phases).
2020, page 2:
performance of fabric-making entities is closely linked to macro-economic

conditions, consumer confidence and spending patterns, considering
the discretionary nature of the end use products, from a demand perspective.
2020, page 2:
Performance of apparel entities is closely linked to macro-economic conditions,

consumer confidence and spending patterns, particularly considering
the discretionary nature of their products.
As per credit rating agency, Standard and Poor’s (S&P), the apparel industry
faces both price and volume cyclicity. As per S&P, the price-cyclicity is more in
the non-branded apparel segment and lesser in the premium branded apparel
segment.
Key credit factors for the branded nondurables industry, July 2015 (click here),
pages 2 and 3:
For apparel companies, price points may be higher, especially for luxury items,
and these items tend to be more discretionary in nature. There can be
some price cyclicality related to changes in consumer discretionary spending
patterns for nonluxury apparel, but it tends to be less cyclical for luxury goods.
For apparel and related companies, volume cyclicality exists because of the

more discretionary nature of the products.
Moreover, if an investor observes the key raw material whose costs have the
most impact on the textile industry, then these are cotton and manmade fibre.
Cotton, as well as manmade fibre (depending on crude oil prices), are volatile
commodities following their own demand and supply cycles.
Spinning industry is cyclical in nature, given that its performance is linked to the
level of volatility in commodity prices (oil or cotton).
In addition, the textile sector sees a high level of seasonality where most of the
sales are seen in the winter season. There are two factors contributing to the
same. First, the shopping for garments increases in the festive season, which
happens in winter. Second, winter garments are usually more high-value in
nature than summer garments. As a result, the sales of the textile industry
especially apparel pick up in winter every year.
2020, page 8:
The apparel sales are seasonal with most of the sales in the second half of the
year during festival season in both the domestic and export markets, and the
sale of higher value winter wear apparels.
Therefore, an investor may note that on average the value of garment sales
increase during the second half of the year in the winters and declines during the
first half of the year in the summers.
Apart from cyclicity linked to general economic cycles and the seasonality during
the year, many times, in some segments of the textile industry, the boom and
bust cycles are due to suboptimal capacity planning by the players.
For example, in the denim segment, the cyclicity is driven by capacity additions.
During the boom phases, many companies start capacity additions, which take
time to get complete. When these capacities start operations simultaneously,
they lead to overcapacity in the industry. As a result, the capacity utilization falls
leading the companies to compete on prices to get orders to run their plants. As
a result, every player witnesses a decline in realizations.
2020, page 2:
The cyclicality in denim fabric manufacturing industry, which is a small segment

of the weaving industry, is also driven by capacity additions as strong growth
results in capacity addition, leading to over-capacity and depressing the capacity
utilisation & realisations.
An investor may read the detailed analysis of one of the denim players, Nandan
Denim Ltd in the following article: Analysis: Nandan Denim Ltd.
7) Diversification, Premiumization and Integration:
From the above discussion, an investor would appreciate that the business of
textile companies is cyclical with low-profit margins. This is true for all the
segments i.e. spinning, fabric and apparel.
In order to improve the profit margins and reduce the cyclicity and seasonality
risks, many textile companies go for different strategies like diversification in
operations, focusing on premium business segments as well as vertical
integration of operations i.e. forward or backward integration.
7.1) Diversification:
An investor would notice that most of the textile companies in the fragmented
industry producing commodity products running a capital-intensive business with
very low pricing power are running a very fragile business. This is evident by the
fact that many small scale textile units go out of business in each economic
downturn, which is common due to the cyclical nature of the textile business.
One strategy used by the textile mills to reduce the risk in their business is to
diversify. Companies diversify their business in the terms of different products,
customers, market geographies, sales channels etc.
Spinning mills diversify their product range by bringing in flexibility to use different
fibres (cotton, manmade, blended etc.) as well as producing yarn of different
count ranges. Such companies can effectively handle the challenges in any one
product segment by shifting production to another segment, which might be
doing good.

page 3:
Product diversification: Players having a diversified product portfolio tend to

have more stable revenues…Companies having capacity to produce multiple
count yarns have better product flexibility. Further, companies
producing blended yarn rather than only cotton yarn, can efficiently tackle the
cyclicality in the cotton yarn demand.
page 2:
Also, cotton spinners which are capable of producing multiple counts/ varieties of

yarns using different varieties of cotton fibres are viewed favourably as it allows
them to shift from one variety to the other in case of price fluctuations in one
variety.
Similarly, a fabric manufacturing unit can diversify its product range by becoming
flexible to use different kinds of yarn like cotton or manmade or blended. In
addition, the fabric maker can diversify its product range by producing fabric of
different specifications like grams per square meter (GSM), knitted, woven or for
products like suiting, shirting, denim, home textiles as well as other features like
colour/dyed and finishing like wrinkle-free etc.
2020, pages 3-4:
For a fabric unit, diversification relates not only to fibre content and type of
yarn (spun vs filament) but also to the gsm range, pick range, width, variety and
finishing of the fabric manufactured.
A diversified product portfolio includes a presence across the type of

fabric manufactured (knitted/ woven), product category (suiting, shirting, denim,
towels, bed sheets etc.), material used (cotton, polyester, rayon, blends, etc),
and finishes (grey, yarn dyed, dyed, value-add finishing such as wrinkle free,
water/oil resistant, etc)
Having the flexibility to alter the product range as per the ongoing market
demand helps a fabric manufacturer to handle cyclicity in different product
segments better.
In the case of the apparel segment, companies usually diversify by catering to

different customer segments by launching multiple brands focusing on different
price points, age groups etc.; so that a slowdown in any target segment or any
challenges faced by one of the brands would not hurt the whole business
significantly.
2020, page 4:
Brands: A retailer with diversified brand offerings catering to different target

markets on the lines of price points, customer segments, age groups etc. will be
less prone to loss of business from a particular brand owing to factors such
as reputational risk and customer perception issues, vis-à-vis a retailer with a
concentrated portfolio.
Therefore, an investor would notice that all the textile companies, be it spinning
mills, fabric or apparel units attempt to diversify their product range and bring in
flexibility to reduce risk in their business model.
Apart from product diversification, companies also focus on targeting different

geographical markets and customers so that they may protect themselves from
issues related to any particular market/customer.

page 4:
Diversified customer base helps mitigate the risk of business getting affected in

case financial health of the counterparty deteriorates. This holds increased
importance due to the cyclical nature of the textile industry.
Many times, textile companies also focus on the mix of sales channels i.e. direct
sales to customers or via dealers to diversify their business risks and improve
their profitability.
Direct sales to the customers are usually more profitable because such sales
save on the commissions paid to dealers. However, such sales come with an
added burden for the companies in the terms of order sourcing, customer
servicing, the credit risk of non-payment by customers etc., which is avoided
when companies engage with dealers.

page 5:
Direct sales to the end customers can lead to better profitability margins for the
textile companies vis-à-vis sales made through the dealer network or through
buying houses. However, the same can lead to elongated payment terms and
exposes the companies to credit risk of the end customers, especially if major
sales are being derived from a particular set of customers. Sales through the
dealer network, on the other hand, can result in bulk production for the mills
and timely payment realisation.
Many times, textile mills, which are mostly small scale units prefer not to handle
these sales & marketing activities and in turn, they route even the direct orders
received by them via dealers. Dealers add further value by acting as financiers
for textile mills by making them faster payments even before they are received
from customers. In addition, dealers also share the credit risk for the textile
companies on behalf of the customers brought in by them.
2020, pages 3-4:
ICRA notes that dealers play an important intermediary role for fabric units

like order aggregation, customer service and sometimes financing as well by
making faster payments to the units. Dealers also add value by sharing the
fabric player’s credit risk. As a result, sometimes, even direct sales are routed by
the entities through dealers for client servicing, faster payments and for
managing the credit risk. Nevertheless, direct relationships typically act as
positive attributes and result in better profitability by saving on dealer
commissions.
However, doing business via dealers reduces the bargaining power of textile
companies because the dealers may create a higher price-based competition
among the mills by choosing a supplier based on the lowest price.
2020, pages 3-4:
However, sourcing orders through dealers/ buying houses also results in limited
bargaining power for manufacturers as buying houses can source from different
suppliers on the basis of the lowest pricing.
Therefore, an investor would appreciate that dealers in the textile industry have
built their place in the system by solving the problems of small scale textile
companies related to sales & marketing, financing and customer credit.
Therefore, an investor may keep this in mind while assessing the sales strategy
of any textile company.
Apart from diversification, another strategy used by textile companies to

strengthen their business model and survive cyclicity associated with the
economic downturn is the premiumization of their product range.
Further advised reading: How to do Business Analysis of a Company
7.2) Entry into premium and value-added products:
From the above discussion, an investor would appreciate that most textile
companies produce commodity, non-differentiable products where a customer
can easily switch from one supplier to another. Such a business takes away the
pricing power of companies and results in intense price-based competition in the
industry. As a result, their business model is very weak.
However, some textile companies from each of the segments of spinning, fabric
and apparel venture into value-added and premium products to strengthen their
business model.
Value-added products (VAPs) bring in customer stickiness where the customer

faces a high switching cost if she intends to replace one supplier with another.
VAPs also offer the possibility of a strong degree of integration with customers.
The tailoring of products to meet specific end-customer needs can make it
more difficult for these customers to easily switch suppliers and adds stability to
producer earnings
To focus on the premium segment, spinning mills focus on producing yarn of
higher counts. Fine quality yarn of higher counts is used in premium apparel and
therefore, has a high realization and profit margins. In addition, the demand for
premium apparel does not decline with moderate changes in its price i.e. price
inelastic. As a result, the textile companies get room to increase prices in case
their input costs go up without a significant decrease in the demand for their
products.
spinners manufacturing finer-quality yarns, measured by counts, are less

vulnerable to raw material price changes as end-product higher realisations
are less elastic to raw material price movements
page 3:
players having ‘finer count’ yarn or ‘higher thread count’ fabric in their product
mix, cater to the elite market segment where demand is relatively price
inelastic and margins are high.
In the case of fabric makers, apart from making premium fabric and selling it to
apparel manufacturers (B2B), a few players sell their fabric directly to customers
(B2C) who wish to get their clothes stitched instead of wearing readymade
garments. Such companies usually create brands around their B2C offering and
are able to earn a high price and profit margin.
2020, page 4:
Brand strength: In addition to being sold to garment manufacturers, fabric is sold

directly to customers who prefer customised stitching over ready-made
garments. Thus, entities focusing on the B2C model, which are able to establish
their brand in the markets by virtue of their designs, quality, product range and
other requisites, are able to command superior pricing power and higher
realisations. Thus, they have higher profit margins compared to entities which
are mostly present in the unbranded commoditised segment.
Similarly, apparel manufacturers attempt to create strong brands, which can give
them pricing power, high-profit margins and customer stickiness.
2020, page 5:
Brand strength: For branded apparel retailers, brand strength manifests itself in
the form of pricing power and the ability to grow.
An investor would appreciate that strong brands whether in the fabrics or apparel
space have higher pricing power, realizations, and profit margins over unbranded
commoditized products. The demand for products of strong brands is usually
price-inelastic i.e. the demand does not fall when there is a moderate increase in
prices. As a result, companies can pass on the increase in their input costs to
their customers and strengthen their business model.
Additionally a strong brand, due to its premium pricing and high-profit margins,
allows companies to handle economic downturns better by offering discounts,
which maintains sales during the tough time from existing customers as well as
other customers who buy products at a reduced cost during discounts.
2020, page 5:
Strong and established brands enjoy a premium pricing over others and also
have better pricing power. In addition, because of the strength of the brand,
the demand is relatively less price elastic, which provides flexibility to pass on
the increase in the input costs to maintain the profit margins. Moreover, given the
premium pricing, strong brands have the cushion to offer discounts during
economic downturns to sustain the demand from existing customers and
potential customers who were earlier reluctant to buy because of higher prices.
Therefore, an investor would appreciate that entry into the premium segment,
offering value-added products and creating strong brands helps companies in
strengthening their business model.
Apart from diversification and premium offerings, textile companies also attempt
to integrate their business operations to make their operations cost-effective and
resistant to cyclical changes in the economy.
7.3) Vertical Integration:
An investor would appreciate from the earlier discussion that the textile industry
is intensely competitive where most of the companies operate at a very low-profit
margin. As a result, the companies’ business is very sensitive to any changes in
the demand or raw material prices. Numerous small players go into losses during
economic downturns and even shut their businesses.
In order to improve their profitability, reduce the volatility and reduce the impact
of fluctuating raw material prices, a few textile mills opt for vertical integration,
both forward and backward integration so that they may perform more value-
adding steps in-house leading to higher profitability. In addition, they are able to
control the supply and quality of raw material as well as save on transportation
and packaging costs of raw material.

page 2:
companies which have integrated nature of business (from yarn-to-fabric/ from

fabric-to-garment/ or, from yarn-to-garment) are generally benefitted by
the synergies associated with lower raw material procurement cost/lower
logistics cost and are viewed positively.
In the case of spinning mills, the companies go for both backward as well as
forward integration. Under backward integration, spinning mills may engage
farmers for contract farming of cotton and own in-house ginning facilities for
preparing cotton for yarn.

page 4:
Spinning mills having their own ginning facilities or engaged in contract

farming of cotton get the advantage of uniformity in raw material quality. Such
companies ensure regular supply of quality cotton.
As mentioned above, in the case of forward integration, spinning mills may go to
the extent of yarn-to-fabric or yarn-to-garment integration and use their in-house
production of yarn to make fabric or apparel. Such a forward integration is better
for the spinning mills as it leads to stability as well as an improvement in profit
margins because the company saves on many components of raw material costs
and benefits from relatively stable profit margins of the fabric business.
While the prices of fabrics also tend to fluctuate in relation to the yarn prices,
the profit margins in fabric-making are steadier vis-a-vis yarn manufacturing,
considering higher raw material holding requirements as well as greater
exposure to volatility in prices of raw materials (cotton/ polyester) in the yarn
business. Besides diversification benefits, captive yarn availability for in-house
consumption results in savings in transportation, packing and selling costs.
Hence forward-integrated mills with sizeable in-house yarn consumption tend to
witness lower volatility in margins than a standalone spinning mill.
Along similar lines, fabric makers go for backward integration in spinning as it
reduces their raw material costs and provides better control on the quality of yarn
available to make the fabric.

page 4:
Fabric manufacturers having backward integration with spinning units save on to

their freight expenses, selling cost and packaging expenses apart from
having better control on the quality.
Fabric manufacturers who go for forward integration into the apparel/garmenting
business earn a better profit margin and simultaneously reduce the cyclicity in
their business operations.
CRISIL Ratings’ criteria for the cotton textiles industry, May 2013, page 2:
Fabric manufacturers, who integrate forwards into garmenting will therefore face
lesser cyclicality risks and command better margins.
From the above discussion on the capital-intensiveness of textile businesses, an
investor would remember that out of all the segments, spinning and fabric-
making are fixed capital intensive whereas garment manufacturing is not fixed
capital intensive. Instead, garment manufacturing is a labour-intensive process.
Therefore, apparel manufacturing units do not prefer to opt for backward

integration into the capital-intensive fabric and spinning units.
The integration assessment is primarily applicable to the spinning, fabric and

home textiles sub-sectors. Apparel manufacturers are not expected to have a
high level of integration due to the asset-light nature of their business model.
Moreover, most apparel retailing companies tend to keep their business as light
as possible because it keeps their investments in the business low, which
improves their return on capital. Additionally, these companies are better able to
handle demand slowdowns due to their lower fixed costs and are able to
increase sales fast during recovery phases as they can increase the outsourcing
of garments to meet the high demand.
2018, pages 2-3:
Apparel entities with an asset-light business model, involving outsourcing of

manufacturing, have lower fixed capital requirements (investment in building and
plant & machinery) as well as lower working capital requirements in comparison
to those entities which have entire manufacturing in-house, as the need for
stocking raw materials/work-in progress gets eliminated. As a result, such
entities are better equipped to face the demand slowdown because of lower
fixed overheads. On the positive side, during an upturn in demand, with
outsourcing systems in place, the operations can be scaled up with increased
outsourcing / adding new suppliers to cater to the demand, without missing out
on market opportunities.
Nevertheless, whenever apparel-manufacturing units choose to go for backward
integration into the fabric of yarn making, then it is mostly the large players,
which can afford to spend significant money on the plant and machinery. As the
companies are now able to capture more value-adding steps in-house; therefore,
backward integration improves the profit margins of garment units.

page 4:
A garment manufacturing unit can also have backward integration with a fabric or
a yarn manufacturing unit (though restricted to large players only because of the
capital intensive nature). The same generally leads to relatively higher
profitability margins owing to the presence of more number of value-added jobs
in-house. For a garmenting unit, backward integration with a fabric
manufacturing unit also allows it to have better control on the quality at the
weaving and processing stages.
Therefore, an investor would notice that in general, any vertical integration for
spinning, fabric as well as garment manufacturing units helps the companies in
increasing their profit margins as well as reducing the volatility in the margins.
Nevertheless, an investor would appreciate from the earlier discussion that in the
textile value chain, the spinning mill segment is much higher capital-intensive
than fabric and apparel businesses. In addition, the spinning mills need to stock
cotton for the non-harvest season leading to high inventory levels and increase
risk of inventory losses.
Therefore, a company that is primarily a yarn manufacturer i.e. spinning mill and
forward integrates into a fabric and garment making business, then it is moving
into segments, which are less capital intensive and with easy to manage
inventory levels.
On the contrary, when fabric or garment making units backwards integrate into
the spinning business, then they enter into a segment, which is much more
capital intensive with difficult inventory management.
Therefore, many times, when fabric and garment units attempt to backwards
integrate into the spinning section, then these companies face many challenges.
For example, when a fabric maker enters into the spinning business, then it is a
segment with different business risks and a higher inventory risk and higher
volatility of margins linked to raw-material price fluctuations. As a result, when
cotton prices in the open market decline, then the integrated fabric player (fabric
+ spinning) faces inventory losses whereas if it had stayed a standalone fabric
maker, then it would have benefited from lower raw material costs.
2020, page 3:
While integration is a positive, it poses challenges as well such as reduction in

operational flexibility in responding to market conditions and heightened
business risks…The risk to profitability is particularly higher in the case of
backward integration into cotton yarn spinning.
overall profit of an integrated fabric manufacturer is exposed to the risk of

inventory loss in times of declining cotton prices, whereas non-integrated fabric
manufacturers would benefit from the procurement of lower-cost yarn from the
market in such times
Similarly, when garment manufacturers decide to enter into backward integration
to the level of spinning, then their risk to profitability increases.
2020, pages 10-11:
The risk to profitability is particularly higher in case of backward integration into

cotton yarn spinning.
As a result, garment manufacturers usually limit their backward integration only
to fabric manufacturing, which provides most of the benefits of integration and
the companies do not need to mandatorily integrate spinning into their business
because the high-quality yarn is easily available in the market.
2020, pages 10-11:
backward integration for apparel entities is largely restricted to fabric weaving

and processing and not as much in yarn spinning. This in turn can be explained
by larger quality control requirements in the weaving and processing stages
and abundant availability of quality yarn in the domestic market.
Whenever we come across yarn to garment integrated players, they are mostly
the cases of originally spinning players who had forward-integrated into apparel
manufacturing and rarely, garment manufacturers who have backwards-
integrated into spinning mills. Usually, the apparel manufacturing divisions of
such forward-integrated spinning mills are very small in comparison to the
spinning operations.
2020, pages 10-11:
While some of the spinning entities have forward integration into

apparel manufacturing, however, given the large scale of their spinning
operations, the extent of such forward integration is limited with apparel
manufacturing consuming only a small percentage of their yarn production
Nevertheless, from the above discussion, an investor would notice that the
integration of operations by textile players helps the companies improve their
profit margins because, now, they can perform a higher number of value-adding
functions in-house and they can save on costs like packaging and transportation
of raw material.
Further advised reading: How to analyse New Companies in Unknown

Industries?
8) Export uncompetitiveness of Indian textile companies:

While analysing different markets that the Indian textile industry caters to and the
competition they face, an investor gets to know that Indian textile companies are
at a disadvantage compared to many other nations.
One of the primary reasons for such cost disadvantages hurting the Indian textile
industry is the duties imposed by the govt.
The sector is exposed to international competition where domestic players have

constrained pricing power due to differential duty structures.
As a result, when an investor assesses the competitiveness of Indian cotton
spinning mills with respect to the producers in China and other South-East Asian
countries, then she notices that Indian spinning mills are less competitive on the
global scale.
the Indian spinning sector compares poorly with that of China and Southeast
Asian countries, thus constraining global competitiveness.
The poor competitiveness of Indian spinning mills is not limited only to cotton
yarn. In fact, in the manmade fibre (MMF) yarn as well, Indian yarn producers are
not competitive enough. Higher taxes and adverse custom duties levied by the
Indian govt seems to have put Indian MMF yarn producers at a disadvantage.
On the contrary, the favourable environment experienced by Chinese MMF yarn

players has led them to have large capacities and benefits from economies of
scale improving their cost competitiveness.
The MMF segment’s growth in India in the past has been marred by the adverse
indirect tax structure on the manmade fibres against cotton. Besides being
taxable at higher rates, the MMF segment has an inverted duty
structure which affects competitiveness of players in the segment.
weak competitive positioning vis-a-vis international players (like those in China)

which have significantly larger manufacturing capacities for manmade fibre and
benefit from economies of scale.
As a result, Indian manmade fibre yarn producers are not able to export their
yarn and most of the production of India’s manmade yarn is consumed
domestically.
Due to lack of competitiveness in the export market, manmade yarn produced in

India is largely used for domestic requirements and consumption
Indian apparel manufacturers also face a challenging environment where they
have witnessed a reduction in export incentives. As a result, their profitability and
in turn export competitiveness has come down. Apparently, the govt. has to
reduce the export incentives to comply with the directions of the World Trade
Organisation (WTO).
2020, page 7:
in recent years wherein frequent revisions in the export incentive rates, partly to

make the export incentive structure compliant with the World Trade Organisation
(WTO) norms, have affected profitability of the Indian apparel exporters.
Export incentives usually contribute about 2% to 7% of the revenue of exporters
in the textile sector.
Changes in the government’s export policy and incentives schemes may impact
the earnings profile of exporters as export incentives account for 2%-7% of their
revenue.
From the earlier discussion, an investor would remember that as per ICRA, in the
last 5 years, spinning mills had a net profit margin (NPM) of 1% whereas fabric
makers and apparel manufacturers had a net profit margin of 3%. In light of the
low net profit margins of textile companies, any change in export incentives that
contribute 2%-7% of revenue may push the company into losses.
It seems that the export incentives to the textile sector in India are less than the
incentives like favourable duty structure available to textile companies in
Vietnam, Sri Lanka, Bangladesh and China. As a result, textile companies of
these countries are able to export to India and give a lot of competition to Indian
textile companies in the Indian market.
Global and Local Competition: The Indian textile industry faces tight

competition from local players as well as from companies in Vietnam, Sri Lanka,
Bangladesh and China, which have cost advantages (labour, power, taxes) as
well as a favourable duty structure on exports
Therefore, an investor would appreciate that despite all the fiscal incentives and
subsidies given by the Indian govt., in the export market, the Indian textile sector
seems to be at a disadvantage when compared to China and other South Asian
and South-East Asian countries.
Summary
The Indian textile industry is characterised by intense competition between
numerous small-scale players. Large-integrated players constitute only a very
minor portion of the industry. Most of the textile players, be it spinning mills,
fabric or garment/apparel manufacturers produce commodity products, which are
non-differentiable from each other; therefore, customers can easily switch from
one supplier to another.
The commodity nature of products has led to intense price-based competition

between textile companies, which has taken away the pricing power of the
companies. As a result, nearly all textile companies earn very low-profit margins.
During economic downturns, demand slowdowns, and phases of raw material
(cotton or manmade fibre) price increases, many textile players go into losses
and even shut their businesses. The business model is very fragile. Only the
largest players with economies of scale and low cost of production are able to
earn sustainable profit margins.
The spinning segment is highly capital-intensive with a large investment needed

to install the mills and a large investment in inventory stocking during the cotton-
harvesting period. It is a power-intensive business where companies need to
continuously spend money on the expansion and modernization of plants to
make them more efficient. Until now, the capital and interest subsidies by the
govt. have supported the capital expenditure by textile companies.
Small-sized commodity yarn producers face many challenges to sustain their

business under intense competition; however, large players and those who focus
on value-added and premium yarn (high count range) are able to earn a high-
profit margin and develop competitive advantages. A few yarn producers do
vertical integration in contract farming, ginning units, fabric and apparel
manufacturing divisions to improve their profit margins. Some also diversify to
become flexible in using different yarn inputs, produce fibre of different count
ranges etc. to mitigate the impacts of cyclical phases.
Fabric making is also a capital-intensive business; however, it has relatively

lower inventory intensity because the good quality yarn is available throughout
the year unlike cotton, which has harvesting seasons. Nevertheless, fabric
making is also a commodity business where the pricing power is low and the
business is susceptible to cotton and crude oil prices (for manmade fibre yarn).
However, the volatility of profit margins of fabric makers is lower than spinning
mills because, first, fabric makers do not have to stock yarn for full-year
production and second, they produce fabric mostly after getting confirmed orders,
which are priced after factoring in current yarn prices.
A few fabric makers go for diversification into processing different types of yarn
(cotton or manmade) and produce different kinds of fabric (GSM, colour, texture,
wrinkle-free water/oil resistance etc.) to mitigate the impact of the cyclical
business environment. To improve their profit margins, fabric producers focus on
the premium segment with price-inelastic demand. A few players sell fabric
directly to consumers under their own brand name. These steps give some
pricing power to the fabric manufacturers where they can pass on the increase in
yarn costs to their customers.
Some fabric makers also go for vertical integration into spinning mills as well as
garment making to earn a higher profit margin. However, entering into the
spinning division is risky because it is much more capital intensive and has
different inventory management dynamics. During times of lower cotton prices,
an integrated fabric maker suffers losses on its cotton stock whereas a
standalone fabric maker would benefit by buying cheaper yarn from the open
market. Therefore, most of the time, fabric makers do forward integration and
limit backward integration.
Garment manufacturing, as well as retailing, has low fixed-capital intensive

nature; however, it is raw material and labour intensive because stitching
garments need a lot of manual intervention and the company needs to stock a lot
of fabric as well as finished garments of different designs, sizes and colours to
supply to retail shops.
Unbranded garments are near commodities where the companies do not have
any pricing power. However, branded garment makers differentiate themselves
by design and product quality. As a result, established brand companies have
some pricing power backed by price-inelastic demand where garment
manufacturers produce clothes after getting confirmed orders and price them by
factoring in the latest fabric/yarn/cotton prices. Therefore, the pricing power in the
apparel segment is limited to established brands; however, it is not a very strong
pricing power because all the brands whether Indian or International have to offer
discounts and match them with the competitors to attract customers to their
shops.
To improve profit margins, garment manufacturers also do vertical integration like

extending into fabric production and yarn spinning. However, most of the time,
backward integration is limited to fabric making because the control over fabric
making serves most of the benefits as the quality yarn is easily available.
Moreover, spinning yarn is a capital intensive business with a lot of inventory
stocking, which exposes integrated garment manufacturers to a lot of business
risk.
Apparel players prefer to stay asset-light because they can easily outsource
garment manufacturing to capture a high demand and the low fixed-cost nature
of the business helps them survive economic downturns better.
Therefore, while analysing any textile company, an investor should focus on the
following points:
 Premium/value-added products: Whether it deals in commodity

products or focuses on the premium and value-added segment.
Premium players have a relatively strong business model.
 Large and integrated operations: Whether it is a small-scale
player or is a large player with a big manufacturing capacity and
integrated operations. Large integrated players have a stronger
business model.
 New modern plants: Whether its plants are new and modern or are
old. New modern plants are cost-efficient. Moreover, old plants
would need capital-intensive modernization to stay competitive.
 Diversified business with flexible production: Whether it is
focusing on a single product segment or is diversified with the
flexibility to use a variety of inputs and produce a variety of products.
Diversification and flexibility in the production process bring strength
to the business model.
We believe that if an investor focuses on these factors while assessing the
business of any textile company, then she would be able to get a more realistic
picture of its business strength.
Regards,
Dr Vijay Malik

Textile

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How to do Business Analysis of Textile Companies

Classification of textile companies

Rating Methodology for Manmade Yarn Manufacturing, CARE, December 2020

Rating methodology – textiles (spinning) by ICRA, March 2022, page 3:

Due to abundant availability of cotton fibre and relatively higher indirect taxes on

2) Spinning – yarn/thread makers:

3) Knitting – fabric/cloth makers:

4) Garmenting – apparel manufacturing and retailing:

Further advised reading: How to analyse New Companies in Unknown

Key characteristics of business model of textile companies

1) Commodity nature of products:

Rating methodology – textiles (spinning) by ICRA, March 2022, page 3:

CRISIL Ratings takes a positive note of value addition in products,

The fabric that needs least processing before it can be used in garmenting will

Garmenting is the final stage of manufacturing in the textile industry. This

Further advised reading: How to do Business Analysis of a Company

2) Competitive intensity and pricing power:

Rating Methodology for Cotton Textile Manufacturing, CARE, November 2020

Rating methodology – textiles (spinning) by ICRA, March 2022, pages 1 & 3:

Rating Methodology for Manmade Yarn Manufacturing, CARE, December 2020,

The manmade yarn industry is relatively fragmented compared to the MMF

Rating methodology – textiles (spinning) by ICRA, March 2022, page 3:

The Indian spinning industry is highly fragmented…Moreover, given

Indian fabric industry is highly fragmented, dominated by a large number

High level of fragmentation and commoditised nature of product results in high

However, players in the branded and premium fabric segment, enjoy

Indian apparel manufacturing industry is highly fragmented and is characterised

As the apparel manufacturing and retailing sectors are fragmented and

This is because even the branded apparel sector is highly competitive in India

Rating methodology – textiles (spinning) by ICRA, January 2018 (click here),

Further advised reading: How to do Financial Analysis of a Company

3) Impact of changing raw material prices:

Rating Methodology for Cotton Textile Manufacturing, CARE, November 2020,

The fabric industry is raw material intensive with yarn cost accounting for

apparel manufacturing industry is raw material and labour intensive with

Rating Methodology for Cotton Textile Manufacturing, CARE, November 2020,

Rating Methodology for Cotton Textile Manufacturing, CARE, November 2020,

Prices of cotton fibre are highly volatile…Cotton, being an agricultural

parity between domestic and international prices. Both prices move in tandem,

Rating Methodology for Cotton Textile Manufacturing, CARE, November 2020,

Fragmented and competitive nature of the industry and competition with the

Rating Methodology for Manmade Yarn Manufacturing, CARE, December 2020,

Manmade yarn manufacturers do not face seasonality risk like their cotton

Being derivatives of crude oil, PSF prices are inherently volatile in nature,

Rating Methodology for Manmade Yarn Manufacturing, CARE, December 2019

on many occasions, a buyer who purchases a larger quantity of VSF has to pay

withdrawing/providing no discounts/credit notes to a VSF spinner and at the

Rating Methodology for Cotton Textile Manufacturing, CARE, November 2020,

For fabric and garment manufacturers, the susceptibility of margins to

Conference call, August 2021, page 3:

The susceptibility of a fabric-maker’s profitability to fluctuations in raw material

Nevertheless, if fabric and apparel manufacturers accept long-period fixed price

Nevertheless, the vulnerability to raw material price fluctuations increases if the

4) Cost competitiveness, economies of scale:

As most of the products made by textile value chain are non-differentiable

Cost position is an important factor in differentiating between companies as

Rating Methodology for Cotton Textile Manufacturing, CARE, September 2018

Rating methodology – textiles (spinning) by ICRA, September 2015 (click here),

Given the intense competition and limited product differentiation, larger

a large revenue base leads to economies of scale in terms of cost efficiencies in

Rating Methodology for Cotton Textile Manufacturing, CARE, November 2020,

For the garment manufacturers, apart from cost advantage, large capacities

5) Capital intensive nature of operations:

Rating Methodology for Cotton Textile Manufacturing, CARE, November 2020,