MUMBAI: The recent government decision to rescind the quality control order (QCO) on several polymer and fibre intermediates will provide a much-needed respite to the downstream textiles sector, particularly readymade garments, ravaged by the punitive 50 percent tariffs imposed by the US which is their largest market, as this eases access to more competitively priced raw material imports. But will adversely impact the upstream polyester yarn segment which may now face increased competition from imports.
The chemicals and fertilisers ministry last week withdrew the QCO on several polymer and fibre intermediates with immediate effect. The QCO order was first issued in October 2023, mandating BIS certification on imported yarn, to address the influx of cheaper polyester yarn from China.
The removal of QCO norms will improve supply of cheaper imported yarn and thus will support the downstream sectors, hit by the tariff headwinds, Crisil said Thursday in a report based on Crisil Rating said Thursday in a report based on analysis of 20 polyester yarn makers who make up 40-45% of the sectoral revenue.
Notably, readymades derive 25-30 percent of its revenue from exports, of which a third are to the US, while, the home textile segment derives two-thirds of its revenue from exports, with the US accounting for 55-60 percent of that. Operating performance of these segments has been impacted with the 50 percent tariffs but will now see some benefits from the QCO removal.
Readymades, which extensively relies on polyester yarn, is likely to benefit more, whereas home textile segment may see a limited positive impact due to its higher dependence on cotton-based exports, the report added. According to Gautam Shahi, a director with the agency, as polyester yarn is a more affordable substitute to cotton yarn, it is extensively used to manufacture value and mid-premium garments. The recent government action is a breather for the downstream textile industry, which has been impacted by the tariffs.
However, lower realisations due to rising competition from imported yarn and softer crude prices will likely keep revenue growth for polyester yarn manufacturers flat at 3-5 percent next fiscal, partly negating the volume uptick due to reduced GST rate.
According to Pranav Shandil, an associate director with the agency, moderating realizations will also shrink the spreads for polyester yarn manufacturers by 10-15 percent. This is after considering benefits from removal of QCO on inputs used in yarn making, predominantly purified terephthalic acid (PTA) and mono ethylene glycol (MEG). This will have operating margins shrinking by 100 bps to 5.5-6 percent next fiscal.