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Rating Criteria for

Cotton Textile Industry

The Indian cotton textile industry occupies a unique position in the economy in
terms of its contribution to industrial production, employment generation and
foreign exchange earnings. Indias dual advantages of raw material availability
(it is the third-largest producer of cotton in the world) and low labour costs
have resulted in a strong production base. India also benefits from its presence
in the entire textile value chain from cotton production to garment
manufacturing. The cotton yarn spinning industry is highly capital-intensive,
faces acute cyclicality, has an extremely fragmented capacity and is intensely
competitive on account of the commoditised nature of the product. Garment
manufacturing, on the other hand, is not as capital intensive as yarn spinning;
however, capacities in this category are fragmented, resulting in lower
economies of scale. The fabric weaving and knitting sector has both large
integrated players, and small operators.

CRITERIA - Corporate Sector

CRISIL has rated a number of companies across the textile value chain.
CRISILs experience shows that some players fare better than others at
managing the industrys inherently cyclical nature, and simultaneously, at
adding value by diversifying the product range. For instance, the established,
vertically-integrated companies have modernised their manufacturing
facilities, and have therefore, been able to enter new export markets. In rating
companies in the textile sector, CRISIL adopts the usual criteria it follows in
rating manufacturing companies; in addition, it has also identified certain key
factors that determine the credit quality of companies in the cotton textile
The key success factors shared by the strong players include optimal installed
capacity, efficient raw material procurement strategies, effective cost and
labour controls, constant modernisation of manufacturing facilities, favourable
position on the quality spectrum, and thrusts towards value addition and
exports. Timely and appropriate capacity additions, taking into account the
global demand-supply balances and fashion trends, is another critical factor for
success in the export-oriented textile industry. A companys ability to manage
its capital structure and working capital during peak cotton procurement
seasons will also determine its financial strength and profitability. The key
parameters impacting the market position and operating efficiency are given
Market Position
Quality and range
A key factor distinguishing players in the commodity yarn market is their
count range. A tilt towards finer counts shield companies from cotton price

fluctuations; this is because yarn realisations in the

finer counts are generally less elastic to cotton
prices, and are substantially higher than those in
coarser counts. The key factors distinguishing
players in the commodity fabric are the texture
and colour ranges. The fabric that needs least
processing before it can be used in garmenting
will have the least price elasticity. This is
applicable for both woven as well as knitted
fabrics. Garmenting (the stitching of fabric into
garments) is the final stage of manufacturing in
the textile industry. This segment generally is not
commoditised in nature, and adding variety to the
product range is not difficult.
Diversified product mix
CRISILs experience shows that companies that
produce both pure cotton and blended yarn
(blend of cotton and synthetic fibre) are better able
to manage cyclicality than the pure cotton yarn
units. A diversified product mix with textile
variants in addition to yarn (such as sewing
threads) and forward integration reduces the
impact of cotton price fluctuations on
profitability. CRISIL takes a positive note of valueadded products such as dyed yarn, gassed and
mercerised yarn and melange yarn as they fetch
better realisations, and help the company to
capture a niche market, thereby strengthening
market position. Likewise in fabrics, a wider range
of fabric, colours and designs help forge strong
relationships with garment exporters and
international retailers, resulting in preferred
vendor status. Fabric manufacturers, who
forward integrate into garmenting will therefore
face lesser cyclicality risks and command better
margins. The key strengths required in
garmenting are strong designing capabilities and
grasp of fashion trends and needs.
Geographical diversification through export
In addition to the pure proportion of exports,
CRISIL also assesses the companys geographical
concentration and ability to capture new markets,
during periods of downturn in the existing
markets. Geographical diversification,
recognition by large garment and fabric houses
and a steady customer base are key factors for
long-term success in exports.

With the expiry of the Multi Fiber Agreement

(MFA) w.e.f January 2005, Indian companies have
the opportunity to focus on international markets
and reduce their geographic concentration risks.
India is seen as a major supplier market. In
CRISILs view, companies that have economies of
scale, modern plants, effective cost controls and
export thrust are better placed in the free trade
regime. In the fabric segment, manufacturers who
offer services such as design development &
weaving / knitting as per requirement of the
garment exporter stand to benefit. CRISIL expects
garment exports to drive the overall textile export
growth and integrated players to benefit more
from the dismantling of quotas. This is because
integrated operations lead to consistent quality
and adherence to time schedules, which are
critical factors necessary for competing in the
garment export market.
Operating efficiency
Cotton procurement efficiencies
Most profitable textile companies are
distinguished by their efficient cotton
procurement strategies. Raw cotton, the primary
input in a spinning unit, constitutes about 60 per
cent of the cost of production and has a significant
impact on the operational performance of
spinning units. Since cotton is an agricultural
commodity, it is exposed to factors such as crop
area, monsoons and pest control. All other
conversion costs and realisations remaining
constant, fluctuations in cotton prices will result
in a corresponding swing in operating profits; this
effect will be evident after a time lag of eight or
nine months, which is typically the period for
which cotton is stored. With growing
international trade and liberalisation of cotton
imports, the cotton procurement patterns of
Indian companies are increasingly influenced by
international cotton price movements. Indias
cotton imports fluctuate based on the shortfall in
domestic cotton output in a given year and also
depends on domestic and international price
parity. Both prices move in tandem, albeit with a
brief time lag. Hence, a judicious mix of imported
and domestic cotton to optimise price and quality
is an important consideration.

CRISIL also looks closely at factors such as a

companys expertise in cotton crop estimation, the
proximity of its units to cotton procurement areas,
modes of purchase (whether in bulk with an
assured uniform quality, or staggered throughout
the season) and the stocking and price positions
taken by the company. While cotton arrivals are
spread over a six-month period from October to
March, quality cotton is usually available in the
first two months. CRISILs experience shows that
companies with strong financial and liquidity
positions are able to source bulk quantities of
quality cotton at the beginning of the season.
Another key factor in cotton procurement is that
bulk purchases result in economies of scale.
Cost structure
Two of the largest cost elements the cotton
spinning industry are labour and power.
Labour: Unlike the developed countries, the Indian
textile industry is only partly mechanised and
continues to employ a large workforce. Given the
industrys labour-intensive nature, an optimal
workforce and cordial labour relations help
ensure uninterrupted operations and controlled
labour costs.
Companies with frequent labour problems have
poor labour efficiency, and therefore, low
profitability. CRISIL evaluates factors such as
labour productivity (in the case of spinning mills
this is measured by operator hours needed to
produce a 100 kilograms of yarn; labour costs vary
from 6 per cent to 14 per cent among CRISIL-rated
companies), total labour costs vis--vis industry
trends, measures initiated to rationalise labour,
likely increases in costs due to future wage
settlements and the likelihood of work stoppages.
Power: For the spinning mills, power costs
typically account for 10 per cent of the production
costs; an uninterrupted supply of power is critical
for consistent yarn quality. Power is a critical
factor even for fabric manufacturers; some large
manufacturers also put up captive power plants as
a measure to reduce power costs. CRISIL
considers factors such as efficiency in power

consumption, captive generation facilities, power

cost-reduction measures, and the resulting
impact on overall operations in textiles.
Apart from captive generation, companies have
also begun to explore other avenues to reduce
power costs. Some textile units rated by CRISIL
also enjoy concessional power from the state
governments, which help them manage increases
in per unit costs.
Modernising a textile unit is a fairly capital
intensive project 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.
The spinning sector is more modernised than the
weaving sector; nearly 35 per cent of its installed
capacity is less than 10 years old. However, the
spinning sector compares poorly with China and
South East Asian countries, which has
constrained its global competitiveness. CRISIL
favourably evaluates companies in the spinning
sector that have constantly focused on
modernisation as a strategy to retain global
competitiveness. This in, CRISILs opinion, will
hold such companies in good stead, especially
after the opening of the global textile trade in 2005
under the provisions of the World Trade
Economies of scale
While scale of operations is a key factor in any
industry, it assumes criticality in commodity
industries such as cotton textiles, where
profitability is dependent more on volumes than
margins. While the minimum economic size for a
spinning unit is 25,000 spindles, companies with
an installed spindlage of 50,000 and above are able
to derive benefits of economies of scale. Large
spindlages also make future value additions
economically viable. Hence, CRISIL assesses the
capacities of textile spinning units, and their
ability to speedily shore up capacities in order to
take advantage of potential upswings in the
market. Large scale operations are also beneficial
in fabric making and garmenting, because scale

helps in costing and in gaining competitive

advantage. Quicker turn around is a key
differentiator for facilities with large capacities.

Thus, in CRISILs opinion, the key success factors
for the cotton textile sector include:

! Revenue diversity in terms of product mix and

For the analysis of the financial risk of a cotton
textile company, CRISIL follows the standard
criteria used for all manufacturing companies.
This criterion is presented in detail in our criteria
publications ' Rating Criteria for Manufacturing
Companies' and 'CRISIL's Approach to Financial


! Economies of scale
! Cotton procurement efficiencies and
! Effective mechanisms to control labour and
power costs