Bank's exposure to Textile sector: Finally some positives; South based lenders (KVB and CUB) key beneficiaries - Antique

In our earlier report in May 2013, we had flagged off rising asset quality risks for Indian banks from their exposure to the metal sector given that significant capex in the metals sector has happened at the peak of the commodity cycle. We have done some similar work on bank's exposure to the textile sector and our view is that the outlook for the textile sector is clearly improving due to stable cotton prices, currency tailwinds, improving power situation in TN and lack of capex in the textile sector in the last two years which should benefit the lenders. South based banks (City Union and Karur Vysysa) with large textile exposure are likely to see lower NPA accretion in this segment.

- While the long term economics of textile industry has always been quite poor (weak earnings power and poor return ratios) due to a whole host of reasons, textile companies have been able to acquire cheap credit from banks under the garb of the TUFS (Technology Upgradation Fund Scheme) .Under the TUFS scheme, textile companies get significant interest subsidy of 4-5% as well other benefits for replacing/modernization of textile machinery. Bank credit to the textile sector has grown at 21% CAGR over FY03 to FY13 while debt of the textile companies has grown at 17.3% CAGR over the same period

- Some of the highly leveraged spinning companies within textile sector suffered huge significant inventory losses in FY11-12 due to sharp volatility in cotton prices. Cotton prices crashed 50%-60% from April 2011 to October 2011. However, since then, banks have been extremely stringent in their lending to the textile sector. Credit growth to the textile sector has been at 12.6% CAGR over FY11-13 and sanctions/disbursements under TUFS have significantly reduced despite TUFS scheme being extended to 12th Plan, (2012-2017).

- With stable raw material prices, local currency depreciating 45-50% especially relatively to China, outlook for the textiles sector especially debt laden spinning segment is improving. Textile spinners are benefiting from higher yarn import demand from China as currency appreciation and high labour costs have made yarn manufacturing non competitive in China. Indian garment manufacturers also likely to benefit at the expense of Bangladesh due to large fires/accidents that have engulfed the various garment factories in Bangladesh resulting in the large western retailers canceling orders. Power situation in Tamil Nadu has also improved due to normal monsoons and with the likely commissioning of Kundankulam nuclear power plant, is likely to get better in the future.

- Interactions with Export Credit Guarantee Corporation suggests that banks are increasing their working capital limits for exporters and buying additional credit insurance which suggests that demand scenario for textiles may be improving. Feedback from rating agencies (Fitch and Crisil) also seems to indicate that outlook for the textile sector (barring synthetic textiles which contribute 30% of overall textiles) is likely to improve in FY13-14 and they may look at upgrades in 2H FY14. Clearly all this is positive for the lenders.

- Our analysis across the textiles sector suggests relatively weak operating cash flows and high levels of debt especially amongst the large players. Top 4-5 large players constitute 40- 50% of the total debt. Within the large 4-5 players, S Kumars has already slipped in to NPA while Lakshmi Cotsyn has been referred to CDR. Reported results of most of the large companies in textiles sector in FY13 indicate improving interest coverage ratios. Smaller textile players are better placed to service debt. Banks with a high exposure to textile (City Union Bank and Karur Vysya Bank) could see lower accretion to non performing assets in this segment.

Source : Equity Bulls

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