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Denim may face margin pressures in India

The denim fabric industry in India may face margin pressures during fiscal ’19 due to oversupply. About 15 to 20 per cent of the total capacity is underutilised. Additionally competition will intensify as several players have undertaken capacity additions. This will translate into a continued denim fabric surplus in the market.

India is a leading denim fabric manufacturer in the world. The last leg of the denim value chain, comprising activities such as stitching, washing, garmenting, sewing etc, is characterised by high labor intensity. A sizeable chunk of these activities is undertaken by small scale industries which are yet to get fully accustomed to the formal banking system and the GST regime.

Operating margins are expected to remain in the range of ten per cent to 11 per cent in fiscal 2018 to ’19. The downturn may be relatively prolonged, partly on account of the regulatory disruptions that the industry underwent in fiscal 2017 to ’18.

Exporters will see some impact on margins because of reduced duty drawback, notwithstanding the increase in availability of input tax credit. However, the long-term demand potential for the segment remains intact due to denim’s versatile fashion appeal among the young populace, rising disposable income and the untapped semi-urban pockets of the country.