Muted sales growth in Indian apparel sector in FY20: ICRA

07 Apr '20

3 min read

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Amid subdued demand everywhere, intense competition and lags in the clearance of export incentives, most Indian apparel sector players are expected to close fiscal 2019-20 with muted sales growth and moderation in profitability and liquidity, according to ICRA, which expects revenues of Indian apparel players to fall by at least 10-15 per cent in 2020-21.

“With the 21-day domestic lockdown,...domestic apparel sales have come to a complete halt. Further, seven of India’s top apparel export destinations, which account for nearly half of India’s total apparel exports, are among the worst affected regions globally. With most of these regions resorting to lockdowns and social distancing, export demand for apparels has also fallen significantly,” said Jayanta Roy, senior vice president and group head, corporate sector ratings, ICRA.

Because of foreign buyers deferring shipments and cancelling orders, the domestic apparel sector is witnessing significant turbulence and the ongoing Spring-Summer Season 2020 is likely to suffer a major setback, ICRA feels.

On the supply side as well, social distancing and lockdowns have disrupted production in recent weeks, given the non-essential and labour-intensive nature of operations. This apart, logistics issues are now affecting shipment of material ready for dispatch, said the rating agency.

Although companies are likely to undertake some cost rationalisation measures such as employee base optimisation, pay cuts, promotional budget cuts and rental renegotiations, ICRA expects high operating leverage, discounted sales to clear inventory backlog and bad debts to result in a shrinkage of their profit margins. It also expects an increase in the receivable turnover period as well as inventory pile-ups because of market lockdowns, according to Indian media reports.

Additionally, order cancellations and a prolonged impact of COVID-19 beyond the running season could result in inventory obsolescence, necessitating write-offs and discounted sales. Most of the work-in-process and finished goods inventories with the domestic players at present would be for the Spring-Summer Season 2020.

Because of the liquidity pressures in the near term, apparel entities are expected to rely on increased borrowings to tide over immediate liquidity pressures. Together with pressure on revenues and profits, these are likely to translate into moderation in debt coverage metrics.

The immediate impact aside, even after the spread of the virus is contained, ICRA expects a prolonged impact on the sector, with recovery likely to be gradual over several months. On the demand side, consumer skepticism to visit crowded places initially could keep footfalls subdued in offline retail, even after the lockdown ends.

Also, overall pressure on corporate performance, which could trigger further job losses and pay cuts across sectors, as well as the overall stress in the economy are likely to affect buying power, which would affect discretionary consumer spending in the near term, resulting in the deferment of purchases, thus affecting demand for the segment.

Similarly, worker skepticism to return to jobs could play out on the supply side. Moreover, disintegration of labour, particularly the unskilled and contractual labour, who have started moving from production hubs to their hometowns and villages, could result in a prolonged disruption on the supply side, even after the operations resume.

This apart, liquidity issues at the manufacturer level are expected to affect their ability to ramp up production for the subsequent seasons. Further, for an effective pick-up, the recovery has to be broad-based across countries, ICRA added.

Fibre2Fashion News Desk (DS)

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