Although domestic market for denim fabrics remains strong, GST regulation and increasing international demand is egging on several denim manufacturers in India to work-up their exports.
For several years now, value realisation for Indian denim manufacturers has remained higher in than domestic market than in exports, although this is gradually changing.
The entry of a clutch of new players in the market has also squeezed margins for some and made the already price-sensitive market even more competitive in recent years.
The India Ratings and Research (Ind-Ra) predicts that while the country’s denim fabric industry will continue to face margin pressures during fiscal 2018-19 due to oversupply, with 15-20 per cent of the total capacity remaining underutilised, the long-term prospects for growth are not all that grim, as domestic demand is likely to grow with the growing popularity of the indigo fabric in smaller towns.
Still, market watchers predict garment making capacity to outpace fabric capacity, although the softening of cotton prices (A fabric of choice in denims) may cushion some of the blow. Yet the situation poses supply-side issues for small mill owners.
Already, not anticipating the adverse impact of GST and demonetisation, several players had undertaken capacity building to add 100-150 million metres per annum (mmpa) to the country’s total output, some of which may remain underutilised, warns Ind-Ra, in a release issued to the press.
However as India’s second-largest, and the world’s fifth largest denim producer, Ahmedabad-headquartered Nandan Denim Ltd., that serves 28+ countries with its annual production capacity of some 110 MMPD to have a turnover Rs 1220 crore in FY 2016-18 — has absorbed some of these changes well by shifting focus to the export market. At present, 98 per cent of Nandan’s revenue comes from domestic production for global brands like Zara, ITC, Pantaloon, Jack and Jones, Gini and Johnny, Mufti etc.
In anticipation of increased international demand, Nandan enhanced its spinning capacity to 141 TPD in 2017, as a result of a Rs 621 crore capacity expansion programme that has now made it Asia’s biggest denim fabric manufacturer. Additionally, the company has strengthened its backward integration to reduce dependency on external yarn procurement, informed Deepak Chiripal, CEO of Nandan Denim Ltd.
Overcapacity a concern for small, but not big manufacturers
In the past five years, Coimbatore-headquartered K G Denims, which has a market capitalisation of Rs 121.73 crore, has been steadily building capacity from 17 lakh meters/month to 26 lakh meters/month and expects to cross 30 lakh meters in the coming few months. With weak demand, this poses a problem.
“The demand has shrunk and retailers are not able to push sales, despite huge discounts as there are poor footfalls in the market, and weak sentiment for buying,” rues Rajan Gupta, General Manager of K G Denim Ltd.
To add to his woes, there is poor fund flow in the market, due to the implementation of GST/Demonetisation. “We are now exporting approximately 40 per cent of our total capacity i.e. close to 10 lakh meters/month and expect to make it 50 per cent in the coming years,” says Rajan.
Overcapacity is not a big concern for India, ranked as the world’s largest producer of denim fabric (about 1,500 mmpa) so long as the long-term, domestic demand remains intact and with the fabric’s versatile fashion appeal finds takers among young Indians with the untapped potential of the semi-urban pockets of the country.
Even international apparel brands, outsource their denim production to local mills to meet the demand of the domestic market, which is now posting double-digit growth showing with the rising brand consciousness, amongst Indian youth. “Out of total installed Indian denim mills capacity of 1.6 -1.7 billion meters/annum, hardly 250-300 million meters gets exported. The rest is all consumed for the domestic market by high-end, international brands, such as Killer, Pepe, Mufti, Pantaloons, Norstorm, Ginny n Jony, Lee, Wrangler, Levis, Numero Uno, Vibe, Xpose, Cantabil etc.,” explains Rajan. Incidentally, the only company that has steady been growing its fabric exports, amidst fierce competition from Pakistani and Turkish denim mills is the flagship company of Ahmedabad-based Lalbhai Group, Arvind Ltd., that remains India’s largest and the world’s fourth-largest exporter of denim fabric.
“We export approximately 50-55 per cent of our total denim fabric production, and approximately 85 per cent of our jeans garment production. Major buyers are in the USA & EU. Western markets are generally stagnant or have de-grown by 1-2%. There is ample headroom to replace basic – core business with value added products from Arvind,” says Aamir Akhtar, CEO, Denims, Arvind Ltd. (Turn to page X for FBC’s exclusive interview with Arvind’s CEO).
A price-sensitive market
Some things however remain unchanged. Pricewise, Indian denim market share is close to 75 per cent in lower price range, where the volume, unorganised business takes place, and 15-20 per cent in middle price range and barely 5-10 per cent in the premium price category, which is what compels most international apparel brands to source their fabric from Indian mills, in order to keep a check on their input cost.
“The denim industry in India is growing at 15 to 18 per cent a year,” says Chiripal, adding that “Several international players have begun to source denim from India due to raw material and other input advantages.”
Category expansion can lead to growth
There is scope for expansion in the women and kids wear’s section.
“Presently, there are only a handful of brands present in these two segments, who are able to capture market share as denims is a costly item in ladies category, where the share has been eaten up by knitted jeggings/kurtis etc..” says Rajan. A search for newer applications for denims could also help if the weight (gsm) range of available denim fabric could be broadened to widen denim application, according to market watchers. “We use denim in furniture, houses, garments, ethnic wear, packaging substitute etc. One just needs to think out of the box,” says Chiripal.
Lastly, growth is also possible with value-added, fashion-led processes. Establishment of high quality processing and washing units could (also) help to improve the quality of finishes and colours in Indian fabric, thus attracting more consumers to try denim.
Regulatory disruptions and squeeze on margins by dealer networks
Although the denim fabric industry is cyclical in nature, characterised by periods of excess capacity, industry watchers expects the present downturn to be relatively prolonged for small manufacturers, mainly on account of the regulatory disruptions of the past two fiscals.
“The credit profile of denim fabric manufacturers is likely to moderate over this fiscal amid the continuing contraction of operating margin and debt-funded capacity expansions,” according to Ind-Ra. As a result, the sector’s operating margins are expected to remain in the range 10-11 per cent in the current fiscal.
“Margins get further reduced for mill owners by established dealer networks,” says Chiripal, hurrying on to add that this is gradually changing with the industry becoming more organised and fashion-conscious.
Impact of cheaper imports from developing countruies
Chiripal admits that countries like China, Bangladesh, Veitnam and Pakistan have a price advantage over Indian manufacturers, but they as they lack the credibility and dependability of their Indian counterparts, this is not a major threat for Indian mills.
Rise in value-seeking consumers
With the Indian youth’s growing exposure to international brands and increasing collaboration between fabric makers and the fashion sector, Indian consumers are now demanding more value from their denim purchases.
Every year, Nandan runs Denim Garage Challenge for students at NIFT and NIDs to have them explore newer possibilities with denims.
“Textile is the backbone of the fashion industry and designers are its face. Embroidery work (Kutch designs) on denim is being admired in the West. Similarly, use of 100% cotton in denims is making ethnic wears like kurta and sari popular among youngsters. All this is possible because of the amalgamation of fashion and fabric,” says Chiripal.
At present, the current per capita consumption of denim is 0.3 pairs per person as compared to 2 pairs in China and 8/9 pairs in UK/US. This leaves tremendous scope for expansion for all players in the denim market.
In the end, fabric manufacturers’ recipe for growth is two-pronged. One, new entrants could diversify their portfolio to tap both domestic and export market with quality-oriented products.
And second, “The Indian government should allow multi-brand FDI in order to have healthy competition among Foreign/Indian brands to increase traction in high end category,” according to Rajan.
Taken together, it would help our denim apparel makers move up the fashion value chain to reap higher realisations from their businesses.