Himatsingka Seide Ltd Management Discussions.

GLOBAL ECONOMIC OVERVIEW

The year 2020 proved to be a challenging year for the global economy on account of the COVID-19 pandemic. Economic activity witnessed unprecedented disruptions and recessionary shocks causing the global economy to contract by 3.3% in 2020 as compared to a growth of 2.9% in 2019. While most major economies, including advanced and emerging, witnessed contraction, China, witnessed moderate growth in 2020.

Advanced Economies were amongst the most a3ected by the pandemic, contracting by 4.7% in 2020. The US economy contracted by 3.5% in 2020 as compared to a growth of 2.3% in 2019; the Euro Area witnessed an even more severe decline in economic activity, which led to a GDP contraction of 6.6% in 2020 as compared to a growth of 1.3% in 2019.

Emerging Markets and Developing Economies on the other hand contracted for the 3rst time in 60 years, registering a contraction of 2.2% in 2020. They fared better than Advanced Economies due to the economic expansion witnessed by China, which grew by 2.3% in 2020 as compared to 6.1% in 2019.

Global GDP is expected to grow by 6.0% in 2021 compared to a contraction of 3.3% in 2020. This anticipated signi3cant expansion in economic growth is expected on account of the successful development of e3ective vaccines to combat the pandemic. Furthermore, the 3scal and monetary policies support extended by various governments, especially the US, will act as an impetus for economic activity and growth during 2021. The Advanced Economies are expected to grow by 5.1% while Emerging Market and Developing Economies are estimated to grow by 6.7%. However, while many economies are on the path to recovery the outlook remains challenging given the divergence in the shape and pace of recovery across economies that may su3er from medium to long term after e3ects of the crisis.

Table 1: World Economic Growth - Projections

Percentage Change (%) 2019 2020 2021(P*) 2022(P*)
World Output 2.9 (3.3) 6.0 4.4
Advanced Economies 1.7 (4.7) 5.1 3.6
United States 2.3 (3.5) 6.4 3.5
Euro Area 1.3 (6.6) 4.4 3.8
- Germany 0.6 (4.9) 3.6 3.4
- France 1.5 (8.2) 5.8 4.2
- Italy 0.3 (8.9) 4.2 3.6
- Spain 2.0 (11.0) 6.4 4.7
Japan 0.7 (4.8) 3.3 2.5
United Kingdom 1.4 (9.9) 5.3 5.1
Canada 1.7 (5.4) 5.0 4.7
Other Advanced Economies 1.7 (2.1) 4.4 3.4
Emerging Market and Developing Economies 3.7 (2.2) 6.7 5.0
Emerging and Developing Asia 5.5 (1.0) 8.6 6.0
- China 6.1 2.3 8.4 5.6
- India ^ 4.2 (8.0) 12.5 6.9
- ASEAN-5 4.9 (3.4) 4.9 6.1
Emerging and Developing Europe 2.1 (2.0) 4.4 3.9
- Russia 1.3 (3.1) 3.8 3.8
Latin America and the Caribbean 0.1 (7.0) 4.6 3.1
- Brazil 1.1 (4.1) 3.7 2.6
- Mexico -0.3 (8.2) 5.0 3.0
Middle East and Central Asia 1.0 (2.9) 3.7 3.8
- Saudi Arabia 0.3 (4.1) 2.9 4.0
Sub-Saharan Africa 3.1 (1.9) 3.4 4.0
- Nigeria 2.2 (1.8) 2.5 2.3
- South Africa 0.2 (7.0) 3.1 2.0

Global merchandize trade volumes contracted by 5.3% in 2020 as compared to a growth of 0.2% registered during 2019. In value terms, global merchandize trade stood at US$ 17.58 trillion down by 7.5% over 2019. The decline was driven by the COVID-19 pandemic, which deaccelerated the pace of economic activity across the globe as most governments announced stringent lockdowns in their countries that led to restricted economic activity. The decline in trade was more during the 3rst half of the year compared to the second half. During the 3rst half of the year the trade declined 15% while strong recovery was witnessed during the second half of the year.

The second half of 2020, witnessed broad based trade recovery across a majority of sectors. Trade recovery started in Q3 of CY 2020 with the goods for which demand increased due to easing lockdowns imposed on account of COVID-19 including a large cross section of textile products.

INDIAN ECONOMY OVERVIEW

The Indian economy faced its worst crisis ever, contracting by 8.0% during FY 21. The 3rst quarter of FY 21 was signi3cantly impacted with GDP contracting by 23.9% on account of a total lockdown across the country, for the most part of the quarter, to contain the COVID-19 pandemic. Overall for the year, the Industry and Services sectors declined by 8.2% and 8.1% respectively, while Agriculture remained relatively resilient growing by 3% over the previous year.

Fixed capital formation, which is an indicator of the level of investments in the country, witnessed a steep decline of 12.4% and private consumption contracted by 9.0%, re3ecting dampened business sentiment and consumer con3dence in FY 21. Contraction in economic activity and lower tax collections contributed to a large 3scal de3cit of 9.5% of GDP for FY 21.

As per IMF, Indias GDP is forecasted to witness a steep expansion of 12.5% during FY 22, making it the fastest growing economy in the world. This expansion can be attributed to Indias adaption to the new normal, rollout of vaccination, and well-coordinated, expansionary 3scal and monetary policies.

While earlier estimates of Indias GDP growth for 2021-22 ranged between 11.1% to 13.0%, the resurgence of the COVID-19 second wave in India since February, 2021 has adversely impacted economic growth prospects. Mobility restrictions, reimposed by several states to contain the spread of the virus, have halted the recovery momentum, which started building up during the initial period of the second half of FY 21. This is expected to have an adverse impact on the earlier economic growth projections.

However, less severe restrictions, a more prepared organized sector and a pick up in vaccination coverage present some of the key mitigating factors going forward. Robust recovery in Advanced Economies and other Emerging Markets, as stated earlier, could provide the much needed tailwind from an external demand perspective.

On the merchandize trade front, Indias total mer-chandize exports during 2020-21 declined by 7.1% and stood at US$ 291.1 billion compared to US$ 313.4 billion in 2019-20. Major export destinations during 2020-21 were North America with a 19.8% share of total exports followed by the North East Asia region with a share of 14.5%. Total merchandize imports during the 3scal year of FY 21 stood at US$ 393.6 billion, a decline of 17.1% from US$ 474.7 billion in FY 20.

In3ation

FY 21 witness a sharp increase in in3ation. The Wholesale Price Index (WPI) in3ation index increased to 129.9 in March 2021, before hitting a low of 117.5 in May, 2020, compared to 120.4 in March, 2020. During the initial phase of the pandemic, the wholesale price in3ation was subdued due to a fall in economic activities. However, as the economy started opening up, the in3ation at the WPI level started rising due to an increase in global commodity prices.

GLOBAL TEXTILE INDUSTRY

The global textile and apparel trade has grown at a CAGR of 4% since 2005 to reach US$ 839 billion in 2019 and is expected to reach US$ 1,000 billion by 2025, growing at a CAGR of 3%. Apparel dominated T&A trade with a 58% share in the overall trade value, followed by fabrics with a share of 19%. The share of Home Textiles in global T&A trade stood at approximately 6% and is expected to remain range bound as global textile and apparel trade grows to a projected US$ 1 trillion mark by 2025.

Figure 7: Global Textile & Apparel Trade

China continues to be the dominant textile and apparel producer and exporter. Its share in global T&A trade has remained at approximately 34% during 2019. However, Chinas share has come down from 39% in 2015 to 34% in 2019. India was the 5th largest supplier of T&A globally in 2019. Vietnam and Bangladesh stand at 2nd and 3rd position respectively, with US$ 43.9 billion and US$ 42.7 billion of exports due to dominate position in exports of apparels.

Table 2: Largest Exporters of Textile and Apparel 2019

Country Textile Apparel Total Share (%)
Exports Exports Exports
China 134.6 149.9 284.5 34
Vietnam 10.2 33.7 43.9 5
Bangladesh 1.8 40.9 42.7 5
Germany 15.5 23.8 39.3 5
India 20.2 16.2 36.4 4
Italy 12.8 23.6 36.4 4
Turkey 12.2 16.1 28.2 3
USA 21.7 5.2 26.9 3
Spain 5 14.3 19.3 2
France 5.5 12 17.6 2
ROW 117.2 146.3 263.5 31
Total 356.8 481.9 838.7

Indian Textile Industry

The Indian textile industry continues to be an important contributor to the Indian economy. It is the second largest employment generator after agriculture as it provides direct employment to over 45 million people and indirect employment to approximately 60 million people in allied sectors. It contributes to approximately 2% of the GDP and 10% of export earnings. The size of Indias domestic textile and apparel market, which was US$ 50 billion in FY 11 is estimated to be approximately US$ 75 billion in FY 21 and it is expected to grow to approximately US$ 190 billion by FY 26, at a CAGR of 20.0% between FY 21 to FY 26. The home textile segment is expected to grow at 14.9% during the same period. Apparel demand at US$ 55 billion, dominated the domestic market with a share close to 74% of the total textile and apparel market in India.

India is the 3fth largest exporter of textile and apparel with approximately US$ 28 billion in 2020-21

Indias domestic textile and apparel market is estimated at US$ 75 billion in 2020-21 and is expected to grow at a 20.4% CAGR to US$ 190 billion by 2025-26

Indias exports of textile and apparel is expected to grow to US$ 65 billion by 2025-26

Overall textile and apparel exports from India during 2020-21 is estimated at US$ 28.40 billion as compared to US$ 34.22 billion during 2019-20. The sector was adversely impacted due to COVID-19, which led to a slump in demand during the 3rst half of the year.

The export of cotton made-ups and fabric was US$ 5.22 billion, a growth of 4.2% over 2019-20. The textile and apparel exports from India is expected to grow at a CAGR of over 18.0% to US$ 65 billion by 2025-26 from an estimated US$ 28 billion in 2020-21.

The Euro Zone (EU-27) continues to be one of the largest destinations for Indian textile and apparel products. Indias export of T&A products to the Euro Zone (EU-27) stood at US$ 5.5 billion during 2020. Exports to EU-27 have witnessed a decline over the last 5 years and clocked negative CAGR of approximately 6%. Contraction in exports till 2019 was further impacted by COVID-19 in 2020. In 2020, the exports of T&A products to EU-27 was down 19.9% on account of COVID-19, which adversely impacted demand for apparel.

Table 3: Textile & Apparel Exports from India to Euro Zone

Categories 2015 2016 2017 2018 2019 2020 CAGR 2015-2020
Fiber 205 214 233 233 181 196 -1%
Filament 107 102 109 126 99 77 -6%
Yarn 474 432 494 495 426 354 -6%
Fabric 413 352 389 352 310 245 -10%
Garments 4,776 4,471 4,601 4,622 4,379 3,357 -7%
Home Textiles 1,015 940 1,074 990 949 829 -4%
Others 416 385 447 542 520 442 1%
Total 7,405 6,896 7,346 7,361 6,865 5,500 -6%

(Source: Wazir Advisors)

Indias textile and apparel exports to the US have grown at a negative CAGR of 1% over the last 5 years. Export was down 10.9% in 2020 due to the pandemic. After witnessing a decline in share in total T&A exports to the US, the home textiles share increased in 2020 to

41.4% compared to 36.6% in 2019. Apparel continued to be the highest contributor to Indias total T&A exports to the US with approximately 44%.

Table 4: Textile & Apparel Exports from India to the United States

Categories 2015 2016 2017 2018 2019 2020 CAGR 2015-2020
Fiber 120 126 136 125 87 101 -3%
Filament 45 38 41 58 47 37 -4%
Yarn 61 53 53 59 54 64 1%
Fabric 450 452 514 536 414 507 2%
Garments 3,869 3,822 3,875 4,025 4,343 3,299 -3%
Home Textiles 3,104 3,092 3,175 3,238 3,093 3,109 0%
Others 337 347 401 458 402 401 4%
Total 7,986 7,930 8,195 8,499 8,440 7,517 -1%

US Imports of Home Textile Products

For Himatsingka, The US continued to be the largest market in FY 21. The total US imports for cotton denominated bedding and bath products stood at US$ 3.8 billion during 2020. This was 9.5% lower than the total imports for such products in 2019 The share of the above US imports that vest with India, China and Pakistan stood at 86.0% during 2020 vs 87.2% during 2019.

Despite enhanced demand for soft home products on account of the pandemic, strained trade relations between the US and China coupled with supply chain challenges reduced the US sourcing of cotton sheets, pillow cases, bed spreads, quilts and Terry towels from China compared to other major countries. Imports from China declined 22.2% while sourcing from India declined by only 7.6% in 2020 as compared to 2019, resulting in increased market share for India.

The US continues to dominate the global market for soft home products. The chart below demonstrates the percentage share of US imports of cotton sheets, pillow cases, bedspreads, quilts and Terry towels that India, China, Pakistan and the rest of the world enjoy. India and China continued to dominate US imports in these categories with a share of approximately 66%. India continues to be the single largest supplier to the US with 40%.

(Source: OTEXA, Department of Commerce, United States of America)

Over the years, India has surpassed China to become the largest supplier of cotton soft home products to the US. While Indias supply of cotton soft home products to the US stood at US$ 1.12 billion in 2010, it now stands at US$ 1.55 billion during 2020. This translates to a CAGR of 3.3%. China, on the other hand, witnessed a CAGR decline of 4.2% over the same period. As a result, Indias contribution in US total imports of soft products has increased from 26.0% in 2010 to 40.0% in 2020.

EU Imports of Home Textile Products

EU-27 imports of cotton-based bed linen, Terry and blankets products are comparable to the US. In 2020, EU-27 imported cotton-based bed linen, Terry and blankets worth Euro 2.02 billion compared to Euro 2.19 billion in 2019. Import of these products has grown at a CAGR of 0.4% over the last 5 years and 1.7% over the last 10 years. India is the third largest exporter of these goods to EU-27 with a Euro 192 million share and has grown its share to this region at a CAGR of 0.7% over the last 10 years.

The top three supplier countries to the EU-27 region constitute approximately 77% of their total imports of cotton soft home products (bed linen, Terry towels and blankets). In 2020, India was the third largest supplier with 9.6% share in the total imports.

In 2020, the UK imported total textile goods (excluding clothing) worth 8.58 billion compared to 5.72 billion in 2019. This signi3cant increase is due to the import of medical masks and PPE kits to combat the COVID-19 pandemic. Import of textile products has grown at a CAGR of 7.2% over the last 10 years and

11.6% over the last 5 years. India is the sixth largest exporter of these goods to the UK with a 332 million share. Imports from China increased signi3cantly in 2020 on account of the import of textile medical supplies like masks and PPE.

GLOBAL COTTON SCENARIO

Cotton is amongst the most extensively used 3ber in the global textile space. Cotton is grown in over 100 countries but the main concentration is limited to a few countries. After witnessing growth in 2019-20, world cotton production decreased in 2020-21 to 24.7 million metric tonnes, a decline of 6.5%, largely driven by declines in yield and lower area harvest in major cotton growing areas.

The US saw a 24.9% decrease with a signi3cantly lower area harvested, especially in Texas. Pakistan production fell 27.4% to 4.5 million bales, owing to the lowest yields in nearly 40 years. However, the decline in production by major cotton growing areas was partly o3set by China and Australia. In 2021-22, the global cotton production is expected to rise 4.7% to about 25.9 million metric tonnes with rising acreage and improving yields among major cotton producing countries.

India and China contribute to approximately 51% of global cotton output. In 2020-21, China regained the position of largest cotton producer in the world with a production output of 6.4 million metric tonnes, an increase of 8.5% over 2019-20. In 2020-21, Indias share in global cotton production increased to 25.1% as compared to 24.6% in 2019-20, while Chinas share increased to 25.9% from 22.0%. Cotton production in the US declined 25.6% after witnessing an increase of 7.5% in 2019-20. Principal causes of the reduction in the US stocks in 2020-21 were a smaller harvest and strong export demand.

The table below shows Indias cotton production vis--vis China, the US and Pakistan over the last 5 years and projections for 2021-22.

Global Cotton Prices

Global and domestic cotton prices witnessed a gradual increase from May, 2020 on account of strong demand witnessed post relaxation in lockdowns mainly on account of lower global cotton production and expected higher capacity utilization for 2020-21. In addition, the ban imposed by the US on imports of Chinese cotton products made in the Xinjiang region due to forced labor issues and higher cotton imports by China has reduced the supply of cotton in the global market.

Table 5: World Cotton Balance Sheet

World Cotton Balance Sheet

Million Metric Tonnes 2016/17 2017/18 2018/19 2019/20 2020/21 2021/22 (P)
Beginning Stocks 19.6 17.5 17.7 17.4 21.3 20.3
Production 23.2 27.0 25.8 26.4 24.7 25.9
Supply 42.9 44.5 43.5 43.9 46.0 46.1
Consumption 25.3 26.7 26.2 22.4 25.7 26.7
Ending Stocks 17.5 17.6 17.4 21.3 20.3 19.4
Stocks/Use Ratio 69.2% 65.9% 66.4% 95.2% 78.8% 72.9%

China Balance Sheet

Million Metric Tonnes 2016/17 2017/18 2018/19 2019/20 2020/21 2021/22 (P)
Beginning Stocks 12.3 10.0 8.3 7.8 8.0 8.5
Production 5.0 6.0 6.0 5.9 6.4 5.8
Imports 1.1 1.2 2.1 1.6 2.7 2.4
Supply 18.4 17.2 16.4 15.3 17.2 16.7
Consumption 8.4 8.9 8.6 7.2 8.7 8.9
Exports - 0 0 0 0 0
Demand 8.4 9.0 8.6 7.2 8.7 8.9
Ending Stocks 10.0 8.3 7.8 8.0 8.5 7.7
Stocks/Use Ratio 119.1% 92.4% 89.8% 111.3% 97.1% 86.7%

India Balance Sheet

Million Metric Tonnes 2016/17 2017/18 2018/19 2019/20 2020/21 2021/22(P)
Beginning Stocks 1.5 1.7 2.0 2.0 3.7 3.7
Production 5.9 6.3 5.6 6.3 6.2 6.3
Imports 0.6 0.4 0.4 0.5 0.2 0.2
Supply 8.0 8.4 8.0 8.7 10.1 10.2
Consumption 5.3 5.3 5.3 4.4 5.1 5.4
Exports 1.0 1.1 0.8 0.7 1.3 1.3
Demand 6.3 6.4 6.1 5.1 6.4 6.7
Ending Stocks 1.7 2.0 2.0 3.7 3.7 3.4
Stocks/Use Ratio 27.3% 31.5% 32.4% 72.8% 57.1% 50.9%