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PRE BUDGET REPORTS

Man Made Fibres; If excise duty on MMF is cut, ensure corresponding reduction on inputs too

MMF India is fifth largest producer of synthetic fiber and yarn in the world. Polyester, Nylon, Acrylic and polypropylene are the major synthetic fibers while Viscose which is Cellulosic fiber – is also included in MMF basket. The MMF textiles have emerged as one of the major global textile trade constituting 68% of it. However, India accounts for only 3% of the global manmade textile exports. Being cotton dominated Industry; MMF sector has a smaller leeway in the economy when seen against global economy. For example the fibre consumption in India is in the ratio of 59:41 between cotton and manmade fibres as against 40:60 ratio worldwide.

Raw material prices and availability play a crucial role in the MMF industry. Raw material cost contributes 75-85% to the total operating cost. The key raw materials used are Purified Terephthalic Acid (PTA), Mono - Ethylene Glycol (MEG) – for Polyester, Caprolactam – for Nylon and Rayon Grade Wood pulp –for Viscose.

Up to the latest available statistics, India has total capacity of 1.76 million tons of Synthetic fibers and 2.19 million tons of Synthetic yarn at end of 2011. Polyester dominates the MMF sector with 67% share in the fiber capacity and 94% share in the yarn capacity. Polyester was followed by Viscose with 24% share in the fibers capacity and 3% share in the yarn capacity.

MMF fiber constitutes 18% of India's total fiber production in FY11. The share of synthetic fiber production of the total fiber production has varied in range of 18-28% since FY1998-FY2011. This volatility was on the back of surge in the cotton production with the use of BT crop and increase in the yields and acreage. However, synthetic fiber production has grown slightly ahead with CAGR of 6% against cotton production which grew with CAGR of 6% in past 13 years. Sharp spike in the cotton prices since FY10 has breathed additional demand for the MMF. The production of MMF grew 19% to 1.27 million mt in FY10 but sharp spike in commodity prices has curtailed the growth to marginal 1% (still on a higher pace) in FY11 to 1.28 million mt. In the nine months period in FY12, synthetic fiber output declined 2% to 0.92 million mt.

On the other hand, the production of MMF yarn and blended yarn has improved in FY10 and FY11. Blended yarn is the combination of cotton and MMF yarn in different proportions. Generally, proportion of cotton in the blended yarn varies from 60-70% and can be used as substitute for the 100% cotton yarn. With the spike in the cotton prices in the past 2 years, the demand for blended yarn is on uptrend. While the blended yarn grew 8% and 13% in FY10 and FY11, the MMF yarn grew 13% and 5% respectively. According to the latest available statistics, production of blended yarn inched up 2% to 594.2 million kg and that of MMF yarn grew 8% to 340 million kg in the nine months period ended December 11. The share of blended yarn in the total yarn production has increased to 18.5% in 9MFY12 against 16.5% in the corresponding previous year and 16.9% in FY11.

As per the industry sources, India enjoys 7.9% of share in the world polyester capacity. With the spike in the cotton costs, the Indian industry has increased share of blended yarn and also increased usage of MMF. Going deeper, Polyester capacity (including fiber and yarn) is expected to grow with a CAGR of 9.2% to 7.9 million MT by 2020 from 3.2 million MT in 2010. The polyester segment consumption can be segregated into PFY – 63% and PSF – 37%. The PSF industry is highly organized with only three players – Reliance Industries, Indo Rama Synthetics and Bombay Dyeing. In PFY segment, RIL is the largest manufacturer accounting for about 55% of the total domestic production and Century Enka, Indo Rama Synthetics, Alok Industries, Garden Silk, JBF Industries are some other significant players. On the flip side Grasim Industries is leading player in VSF while Vardhman Acrylics and Indian Acrylics are frontrunners in Acrylic fibers. JCT, Century Enka and SRF are the big names in Nylon sector.

While man-made fibre production is highly concentrated, with limited players engaged in manufacturing of MMF, the value added MMF textiles manufacture is primarily in the decentralized sector, with presence of large number of small and medium enterprises. Synthetic fabric constituted 35% share of the total fabric production while the blended fabric constituted 13% of fabric production. Synthetic fabric production slipped 5% to 21765 million sq mt in FY11 and 6% to 15613 million sq mt in nine months ended December 11.

The MMF industry has reported pale results in the nine months ended December 11. Aggregates of 19 MMF companies have reported with 8% dip in the Net Profit at Rs 1277 crore over modest 22% increase in the revenues at Rs 20299 crore. Spike in the raw material cost have dented operating margins by whooping 470 bps and dragged down the profitability. Disruptions in availability of PTA have also taken the sheen of the sector.

MMF exports are also very competitive. The share of MMF exports to the total textile exports (in value terms) grew from marginal 7% in FY05 to modest 26% in FY10. MMF textile exports grew 13% in FY11 and 34% in 9MFY12. During the 12th Five Year Plan, the Indian Government envisaged a CAGR of 16% in MMF textiles exports to reach at least US$ 11.5 billion by the year 2016-17.

Companies to Watch:

JBF Industries, Reliance Industries, Century Enka, Indorama Synthetics, Garden Silk Mills, Grasim industries, Aditya Birla Nuvo, SRF etc

Outlook:

Besides competition from cotton, the MMF industry is also feeling pressure of rise in the crude oil prices and there by reporting lower margins. Extending TUFS to MMF sector and promoting neutral fiber policy, with suitable safeguards (corresponding cut in the duty on inputs) will give a level playing field for MMF in line with cotton and load the industry to be capable for meeting growing demand requirements. Given the changing consumption pattern in favor of man-made fibre based textiles, need arises to assess particularly the medium term and long term demand for manmade fibres in India. Any benefits to boost MMF capacity and exports will improve its competitiveness in global trade.

The textile industry, including cotton textile producers, exporters and the apparel exporters have sought reduction in excise duty on Man Made Fibres from 10% to 4% optional excise duty, to ensure parity along with cotton textiles. While this will be welcome for Man Made fibre sector, if and only if, there is a corresponding reduction in the excise duty on inputs like PTA, MEG, DMT, caprolactam, acrylonitrile etc. Otherwise, there will be accumulation of cenvat credit, and the MMF sector can suffer badly, eroding already wafer thin and falling margins.