Demand for apparels is expected to slowdown in near term following the government's decision to demonetise high value notes, and and winter-wear segment would be the worst affected, rating agency ICRA said in a report here.
The adverse impact of the demonetisation on disposable incomes and hence consumer spending has resulted in a slowdown in domestic demand for apparels and other end-products of textile industry in the immediate term.
The inventory accumulation with the retailers will, in turn, cause deferment of purchases from apparel/home-textile manufacturers focused on domestic market in the near term, besides resulting in stretched payments.
This will affect the cash flow of the textile industry and is likely to drive a constraint in the demand for the entire textile value-chain, ICRA said.
While textile retailers are facing immediate effect, the impact on apparel manufacturers and other intermediaries in the value chain is expected to be felt with a lag of a few weeks, with reduction in orders due to a slower offtake of the channel inventory.
The overall impact on the sector, however, is expected to be limited as 1/3rd of the Indian textile industry estimated to be export focused directly or indirectly.
Also, as the demand reverts back to a steady state over the next few months with expected improvement in liquidity, this impact will be neutralised.
In ICRA's assessment, the impact of demonetisation is likely to be the most severe for winter-wear retailers and manufacturers focused on the domestic market, who witness 60-70 percent of their annual sales during the period October-February.
Though from the manufacturers' end, the shipments typically take place by September-October, pressure on sales in the retail space during the subsequent peak season can indirectly affect manufacturers.
ICRA said that the harvest season for cotton in India begins in October, with major cotton arrivals happening till March. New cotton arrivals are typically accompanied by softening of cotton prices from the levels during the period April-September.
While a similar trend was observed this year, announcement of demonetisation on November 8 has delayed cotton arrivals in the market due to widespread prevalence of cash payments to farmers.
Accordingly, farmers are holding on to inventories resulting in a fall in daily cotton arrivals in November 2016, thereby resulting in artificial supply shortage and bottoming of cotton prices.
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