Stitched to Grow @ Double Digits

Onicras Outlook on SMEs In Readymade

Garment Industry
FY: 2013-14
 Report on Manufacturing of Readymade Garments

CONTENTS

- Overview

- The Growth Story: Kids wear the fastest growing segment

- Outlook on demand: Strong Domestic and Global Demand Expected

- Onicras Outlook on SMEs in readymade garment industry

- Challenges that Onicra foresee

- External References

- Contact us

1
 Report on Manufacturing of Readymade Garments

OVERVIEW
This report by the Onicra rating team has tried to scan the micro and macro economic
factors of garments industry and its impact on the players operating. Garments industry is
one of the most dynamic sectors of the world and is the best example of consumer driven
market. The global business has been fragmented into two categories the producers and
the consumers. In recent years USA has emerged as the largest consumer on the other
side Asia has shown its dominance in global production and export.

The countries contributing to Asias production are China, India, Bangladesh and few
others. The Asian countries are facing competition among themselves with China
dominating the asian production & exports due to its advance technology, abundance of
workforce and developed infrastructure.

India is the second largest producer of textile and garments with 24% of world spindle
capacity. The indian apparel sector is one of the largest contributing sectors of Indias
exports worldwide, this sector contributes to 4% of Indias GDP. The indian apparel exports
have shown a robust growth in the past decade due to removal of quota export by the
Government of India (GoI). The indian government has taken several initiatives to promote
the textile and apparel industry with special attention for SME sector which contributes to
more than half of the apparel industry. It has been noticed that the major segment of
consumers are between the age group of 16-35 Years and there is a shift in demand from
natural to man made fibres. The trends shows that the kids wear segment is growing at a
faster pace than the other segments of the industry and the same is going to continue in
the future.

Marking the growth and demand of the industry the players have prepared themselves for
the upcoming demands by doing technical enhancement, increasing their capacities and
adopting stringent quality control measures. Government initiatives have played a pivotal
role in the growth and development of the sector however, a lot has to be done in context
of infrastructure, developed logistics, easy availability of funds for SMEs, R&D, innovation
and skill development.

2
 Report on Manufacturing of Readymade Garments

The Growth Story: Kids wear the fastest growing segment

India's growing population has been a key driver for growth in readymade garment in the
country complemented by the growing population which is exposed to changing taste
and fashion and the rising female workforce participation. The domestic apparel industry
which constitutes of four segments mens wear, womens wear and kids wear (both girls
and boys) is expected to record a compound annual growth rate (CAGR) of 9% over 2011-
21. Currently, mens wear is the biggest segment of the apparel market constituting 43% of
the total market; however, kids wear and womens wear are growing faster than mens
segment (CAGR of 8%) and is expected to grow 10.5% and 9% respectively. As per Ministry
of Textiles (MoT) the kids wear segment is anticipated to capture larger market share by the
end of 2021.

Total Apparel Market INR (Cr.)

500,000 462,250
450,000
400,000
CAGR 9%
350,000
294,000
300,000
250,000
190,300
200,000
150,000
100,000
50,000
0
2011(E) 2016 (P) 2021 (P)

Segment Split

3
 Report on Manufacturing of Readymade Garments

2011 (E)
Mens Womens Boys Girls

9%
10%

43%

38%

2016 (P) 2021 (P)

Mens Womens Boys Girls Mens Womens Boys Girls

10% 11%
11% 11%
41% 40%

38% 38%

Source: Ministry of Textiles

India is the world's second largest producer of textiles and garments. Indian textile industry
accounts for about 24% of the worlds spindle capacity and 8% of global rotor capacity. Its
predominant presence in the Indian economy is manifested in terms of its significant
contribution to the industrial production (~14%), direct employment generation (35 million
workforce) and foreign exchange earnings (~27%) in FY13. Today the Apperal industry
contributes to almost 4% of the Indias GDP.

4
 Report on Manufacturing of Readymade Garments

The contribution of Apparel sector to GDP is 4%

20% Food & Beverages

Furniture Furnishing Etc.
32%
Gross Rent Fuel & Power
3% Apparel
Medical & Health Services
Transport & Communication
20% 5% Leisure & Education
Others
11%
5% 4%

GDP: USD 1.73 Trillion

Private Consumption Public Spending & Investment

USD 1000 Billion (58%) USD 730 Billion (42%)

Retail: Non Retail:

USD 470 Billion (47%) USD 530 Billion (53%)

Textile & Apparel Textile & Apparel

Domestic Market: Exports:
USD 58 Billion USD 31 Billion (12%)

Apparel Apparel
USD 40 Billion (69%) USD 18 Billion (31%)

Apparel Apparel
USD 18 Billion (31%) USD 18 Billion (31%)
Source: Ministry of Textiles

5
 Report on Manufacturing of Readymade Garments

The recent change in the government policies to remove excise duty, allowing 100%
foreign direct investment (FDI), de- reservation of readymade garments, hosiery and
knitwear from the SSI sector, extension of 2% Rupee Export Credit Interest Rate Subvention
Scheme for readymade garments till 31st March 2014 and interest rate subvention of 2%
extended on pre and post shipment rupee export credit for readymade garments has
provided a supportive platform for higher growth. Also withdrawal of nearly 16%
countervailing duty (CVD) on import of readymade garments products from Bangladesh
would raise exports to nearly 35.00% in the first seven months of the current fiscal year It is
estimated that textile industry will require `13,200 Crore of new capital investments over the
next five years.

Other initiatives by Government of India (GoI)

- Ministry of Textile were allotted ` 50 crore to initiate setting up apparel parks within the Scheme
for Integrated Textile Parks (SITP) to house apparel manufacturing units. Till date, 61 textile parks
are sanctioned under the scheme and are expected to generate over 1 million jobs.
- Under the Apparel Parks For Export Scheme, 12 projects are sanctioned with the Government of
Indias share of ` 190 crore.
- The Clothing Manufacturers Association of India (CMAI) signed a MOU with Mauritius Export
Association (MEXA) to strengthen the cooperation in the field of fashion and design promotion,
education and training through effective knowledge network of textiles professional and
industry representatives of India and Mauritius
- The Ministry of Textiles commenced an initiative to establish institutes under the public-private
partnership (PPP) model to encourage private sector participation in the development of the
industry.

Apart from the measures which are taken by the government there are various body which
are also working towards the growth of readymade garments sectors such as Apparel
Export Promotion Council (AEPC) which is a official body of apparel exporters in India that
provides invaluable assistance to Indian exporters as well as importers who choose India as
their preferred sourcing destination for garments.

6
 Report on Manufacturing of Readymade Garments

Outlook on demand: Strong Domestic and Global Demand

Expected

Indias garment industry is one of the mainstays of the national economy. It contribute 69%
to textile market share in the FY12 and it is also one of the largest contributing sectors of
Indias exports worldwide. Exports of readymade garments depicted a robust 24.80%
growth in FY12 to reach `62,630 crore against 5.40% growth in FY11. Exports of garment
products from India have increased steadily over the last few years, particularly after 2004
when textiles exports quota was discontinued. The industry is now exploring markets of
Japan, Middle East and South America which have a huge potential for readymade
garment exports.

The largest segment for the readymade garment segment includes the age-group of 16-35
years old people that is very brand conscious and gives priority to high quality. The sector
has been growing as the disposable income of the people are rising, the preference of the
consumer are changing from need based to experience based. Branded readymade
garments accounts for over 21% of the readymade garment industry. Man Made fabric
(MMF) is in great demand and has recorded an increase of about 2% in FY13 and
production stood at 1,23,000 crore tones in FY12. Indias domestic ready made garments
market is estimated at around `2 lac crore, with the unorganized sector accounting for
more than half of the market.

Textile and garments sector occupies significant position in total volume of merchandise
trade across countries. The textile and apparel trade was estimated to be Rs. 42.50 lac
crore in 2011 and is expected to grow at a CAGR of 5% in the next 10 years. In the global
textile market the consumption hub is USA, Canada, European Union, China and Japan
contributing to more than 60% of the global consumption.

7
 Report on Manufacturing of Readymade Garments

Source: Ministry of Textiles

To cater the demand more and more production is required which depends upon the
availability of raw material and manpower. The readymade garment manufacturing is
highly labour intensive and is therefore characterized by low entry barriers. It is second in
terms of employment generation after agriculture industry. The availability of cheap labor is
one of the factor for the movement of MNCs from developed nation to developing nation.

Dominance of Asian players in global trade

USA in the year 2005 removed the quota system on textile and garments imports which
resulted into heavy import of the goods. Asia being the principal exporter benifited by the
move. Countries like India, China, Bangladesh, Pakistan, Vietnam, Thailand and Indonesia
are considered as the production hubs contributes to more than 60% of global producion.
India is one of the leading suppliers of readymade garments both in USA and EU. This shows
that the developed nations are highly dependent on the developing countries for

one of the basic requirement of living Garments. The reason for such dependence is
cheap manpower and availability of raw materials in the developing nations. This edge of

8
 Report on Manufacturing of Readymade Garments

developing countries over developed countries is attracting the MNCs to invest in these
countries. India is one of the major contributors in garments manufacturing and export as
well.

However, in order to safeguard the interest of domestic manufacturers US government

imposed certain restrictions on import of garments. This move had a negative impact on
manufacturers who had their facility in other countries. Many countries still have the quota
system to safeguard the interest of their domestic manufacturers. Other move to safeguard
the interest of domestic producer is increasing import duty to bring the cost of domestic &
imported goods at par.

Position of India unstable in the global markets

India is one of the favorite spot in the eyes of international investors for garments
manufacturing and export. In the global market exports of clothing, India ranked as the
fifth largest exporter as per WTO data 2011, trailing Bangladesh, Hong Kong, EU-27 and
China. In the global exports of textiles, India ranked as the third largest exporter, trailing EU-
27 and China, as per WTO data 2011. Key factors affecting the industry over the past five
years were population growth, disposable income levels and international trade levels.
Consumers need clothing for practical reasons, causing demand to grow as the global
population increases. Industry revenue is forecasted to grow strongly over the five years
through 2017, as demand from growing middle classes in emerging economies becomes
even stronger. Concentration in the industry has increased slightly over the past five years
due to mergers and acquisition of industry participants.

9
 Report on Manufacturing of Readymade Garments

However Indias position in global arena is on a shaky platform as it is facing tough

competition from its neighboring countries such as China & Bangladesh. Talking about these
three Asian countries the labor in Bangladesh is cheapest and Indias labor is costliest. China
is technologically more advance than India and Bangladesh and in terms of fabric especially
silk, Bangladesh is the leader. The fuel prices in India are the highest among these countries.
China is the leader in exports with more than 40% market share. From the above point it can
clearly be inferred that India is not in a leading position and will have to toil to reap success.

Adding to the trouble is the Indian governments unilateral trade initiative of opening its door
for duty free trade of 46 textile items from Bangladesh. This move is lethal for domestic
garments manufacturer and the most affected clusters would be Tirupur, Ludhiana and West
Bengal however this move will help Bangladesh to increase its revenue by more than double.

To overcome these challenges government have taken many initiatives one of which is 100%
FDI by automatic route. This will attract the foreign investor to invest in the indian market,
increasing the chance of India to increse its overall marketshare.

Onicras Outlook on SMEs in readymade garment industry

According to United Nations Industrial Development Organization (UNIDO) there are 13 SME
clusters of ready made garments in India. Among the 13 clusters Tamil Nadu, Maharashtra
and NCR region is leading the chart in terms of annual turnover. In terms of exports Madhya
Pradesh, Maharashtra, Andra Pradesh, Gujarat and Delhi are leading from the front, however
after generating the maximum employment and maximun number of units West Bengal still
lags in terms of turnover.
 Report on Manufacturing of Readymade Garments

13 SMEs clusters for ready made garments in India

Source: Ministry of textile

 Report on Manufacturing of Readymade Garments

Financial Outlook 1

EBITDA Margin Vs. PAT Margin

12.00
10.00
10.25
8.00 9.21
8.80
Percentage

6.00
4.00
4.04
2.00 3.32 3.35
0.00
FY10 FY11 FY12
Financial Year
EBITDA Margin PAT Margin

ROCE Vs. ROE

14.00 12.04 11.62
12.00 10.72
10.00
Percentage

8.00 9.47 10.01

6.00 8.56
4.00
2.00
0.00
FY10 FY11 FY12
Financial Years
Return on Capital Employed Return on Equity

1 A sample data of 30 companies across India was chosen from the entities that have been rated by Onicra during the period
January2013 to June2013 as a representative of the SME units. These entities are involved in manufacturing of readymade
garments and have a turnover slab of more than `2 crore.
 Report on Manufacturing of Readymade Garments

Total Debt - Equity Ratio

1.20

1.00

0.80 0.96 0.97

Times

0.60
0.68
0.40

0.20

0.00
FY10 FY11 FY12

Adj. Gearing (Total Debt/Equity)

Turnover Ratios

120
97
100 90 90
80
80
66
Days

58 56
60 50

40

20

0
FY11 FY12

Debtor Days Creditor Days Inventory Days Operating Cycle

 Report on Manufacturing of Readymade Garments

Interest Coverage Ratio

3.81
3.47
3.07

FY10 FY11 FY12

Interest Coverage Ratio

Revenue growth remained strong driven by increased demand in both import and export
market, however, margins (EBITDA) remained constrained: out of the total sample, 73% of the
units have posted an increase in revenue during all the financial years under study which
depicts incraese in demand of readymade garments. However, margins remained stagnant
as most of the companies were unable to control over its fixed overheads. The EBITDA margin
has declined to 9.21% for FY12 as against 10.25% for FY10. Onicra believes that the overall
profitability of industry will remain constrained in near short term on account of devaluating
rupee, increase in raw material prices, soaring fuel prices and higher labour costs.

Similarly, PAT margin remained subdude on account of account of high interest payments
made for short and long term borrowings of the units which is also depicted by a higher
average cost of borrowings and a moderate interest service coverage ratio. Onicra expects
that the overall profitability of the SMEs involved in readymade garment manufacturing to
remain constrained on account of increased interest payments.

The returns generated by the rated sample remained stable for all the financial years under
study with a marginal increment in FY12. As decribed earlier a lot is needed to be done by
 Report on Manufacturing of Readymade Garments

the units to limit their overhead expenses in order to generate higher returns.

The business units rated by Onicra has exposure to debt which is almost equivalent to equity
invested in the business. The major portion of debt (66% of total borrowing outstanding as on
31 March 2012) comprised of working capital loans primarily taken to fund inventory. More
concentrated efforts is needed from the governments side on easy financing to readymade
garments SMEs, so that they can expand further.

Challenges that Onicra foresee

Although Government of Indias several cluster development initiatives involving technical

assistance, subsidies for technology upgradation and marketing support has strengthened
the competitiveness of the SMEs and provided them with economy of scale, bargaining
power, networking oppertunities and competiveness they are also challanged by various
limitations. Some of them are stated below:

Due to intense competition among various players, 65% of the merchandise is sold at
a discounted rate as against 40% earlier.
Intense competition from the leading brand and their attractive discounting policy
has made SMEs difficult to operate.
SMEs can concentrate only in few cities and towns and as the disposable income of
the people is increasing it is difficult for them to operate.
Due to limited capacity restriction these SMEs cannot operate beyond a certain level.
Additionally, inadequate logistics and improper supply chain managements has
created huge problems for the smaller players.

For advertising and brand building, these smaller players are forced to extend their
reach geographically, which makes their supply chain management more complex.
To match with increasing demand in competitive markets, stress on producing
volumes also has increased. To sustain existence these players will have to inject in
 Report on Manufacturing of Readymade Garments

more investments to their businesses in the areas of designing capabilities, brand

making and retailing.
It is difficult for the SMEs to raise funds from outside as they are highly hit by any non-
conductive/conducive change in its macro environment.
Lack of skilled labour in the sector
Rising cotton and yarn prices which are very much dependent on macro
environment.
The Indian economy being exposed to global economic environment has been impacted by
the global uncertainties. In addition, on the internal front, the economy is facing challenges
due to inflationary pressures, tight monetary conditions and low investments, delays in policy
decision, high interest rates, slowing GDP growth, currency depreciation, fuel shortages, weak
off-takers, execution delays and prospects of slowing traffic growth for transportation.
 Report on Manufacturing of Readymade Garments

EXTERNAL REFERENCES

http://industrialcompliance.wikispaces.com/Scenario+of+Apparel+industry+in+India

http://articles.fibre2fashion.com/

http://www.fibre2fashion.com

http://www.textileassociationindia.org

http://www.ediindia.org/DSR/BANGALORE%20DS.pdf

http://texmin.nic.in/annualrep/ar_12_13_english.pdf

Disclaimer

Information in this publication is intended to provide only a general outline of the subjects covered. It
should neither be regarded as comprehensive nor sufficient for making decisions, nor should be used in
place of professional advice. Onicra Credit Rating Agency of India Ltd. accepts no responsibility for
any loss arising from any action taken or not taken by anyone using this material.
 Report on Manufacturing of Readymade Garments

Contact Us
Madhuresh
+91 7838594866
madhuresh@onicra.com

Avishek Sarkar
+91 1243076000
avishek.sarkar@onicra.com

Rohan Rastogi
+91 1243076000
rohan.rastogi@onicra.com

GURGAON KOLKATA MUMBAI

Corporate office Onicra Credit Rating Onicra Credit Rating Agency

Onicra Credit Rating Agency Agency of India Ltd. of India Ltd.
of India Ltd. 7B, Justice Dwarka Nath 520, 5th Floor
Vatika City Point Road, Nirmal Corporate Centre,
7th Floor MG Road Kolkata - 700029 Nirmal Life Style,
Gurgaon-122001 India LBS Marg, Mulund (West)
Haryana Mumbai 400080
India India
Tel: +91 124 3076000 CHENNAI
Fax: +91 124 4103238 Onicra Credit Rating NOIDA
Agency of India Ltd. Onicra Credit Rating Agency
25, Ranganathan Gardens, of India Ltd.
Rating office Ground Floor, 15th B10, Sector - 59
Onicra Credit Rating Agency Main Road, Noida 201301
of India Ltd. Annagar West, India
SME Division Chennai-600040
4th Floor India LUCKNOW
95, Sector 44, Onicra Credit Rating Agency
Gurgaon-122003 of India Ltd.
Haryana, Onicra Credit Rating Aman Palace, Purani Chungi
India Agency of India Ltd. Kanpur Road
N-705, 7th Floor, North Block, Lucknow
Manipal Centre India
47, Dickenson Road
Bangalore 560042
India