2nd COVID wave to delay full recovery for Indian apparel sector: ICRA

Given the resurgence of COVID-19 cases in India and some of the key export markets, the full recovery for Indian apparel players is expected to be prolonged and pushed back to FY23, ICRA Ratings has said in its latest report. Their business performance in FY22, however, is expected to be better than FY21, as companies are better prepared to follow protocols.

The continued favourable progress on the vaccination rollout and a material shift witnessed towards online shopping will cushion the adverse impact on the brick-and-mortar outlets, helping companies report a better performance vis-à-vis last year, ICRA said in its recent report titled, “Full recovery to pre-COVID levels likely only by FY2023, amid lingering impact of the pandemic.”

Further, lockdown restrictions are likely to be more targeted and regionally focused vis-à-vis the national lockdown implemented last year, and companies are better prepared to follow protocols, respond to restrictions and minimise loss of operations, the report said.

ICRA projects the Indian apparel companies to report double-digit growth in FY22 albeit on a low base, achieving ~85-95 per cent of the pre-COVID turnover levels, broadly maintaining the level of recovery achieved in H2 FY21. Besides pent-up and festive demand, which temporarily supported demand during Q3 FY21, increased mobility amidst the easing of the lockdowns increased consumer confidence in H2 FY21. This encouraged higher footfalls in marketplaces and drove discretionary consumer spending.

“The trend seen in FY21 is corroborated from the rating movements as well. While the credit ratio (ratio of upgrades to downgrades) for apparel companies remained at less than 1 in FY21, reflecting a weakening of the credit profiles amid COVID-19 induced challenges, nearly two-thirds of the downgrades happened in the initial seven months of FY21, with downgrade pressures subsiding significantly from November 2020 onwards,” said Jayanta Roy, senior vice president & group head, Corporate Sector Ratings, ICRA.

In FY21, apparel exporters in ICRA’s sample are estimated to have reported a 20-25 per cent decline in turnover, and a 50-75 basis points (bps) decline in operating margins, following a 200-bps decline in FY20 owing to a revision in export incentive rates and a COVID-led slowdown witnessed from Q4 FY20 onwards. For FY22, ICRA expects top-line growth of ~15-20 per cent for apparel exporters with range-bound margins amid continued discounting requirements, volatile demand patterns and intense competition in the global apparel markets.

Apparel retailers are expected to report a 35-40 per cent growth in turnover in FY22, with partial recovery in operating margins. However, margins are expected to remain lower than the pre-COVID levels by ~200-300 bps. Domestic apparel retailers are estimated to have witnessed ~35-40 per cent decline in turnover and a sharp contraction of ~400-500 bps in their operating margins in FY21, with steep discounts to liquidate channel inventories and high fixed costs such as rentals, sales force etc, despite steps taken to curtail these costs.

For FY22, apart from these continued pressures, increased raw material costs are likely to limit improvement in margins for apparel players. There has been a sharp surge in yarn prices across the board. In March 2021, cotton, polyester and viscose yarn prices averaged ~21-22 per cent higher than the level seen about three months ago, and ~40 per cent, 26 per cent and 19 per cent higher respectively, than the average level in March 2020.

“While the demand for apparels had improved in the recent quarters, it remained below pre-COVID levels. This apart, the recent resurgence in COVID cases in key metros and tier-I cities is likely to keep the demand weak in the near term. Even after the infections subside, the resultant higher channel inventory is expected to keep it a buyers’ market, allowing sellers limited flexibility to pass on the cost increases to the buyers. This is expected to cap the improvement in profitability during FY22, despite the y-o-y increase in turnover,” Nidhi Marwaha, vice president & co-head, Corporate Sector Ratings, ICRA, said.

Nevertheless, the partial recovery in sales and profitability is expected to result in some improvement in coverage metrics of apparel players during FY22, supported by limited capex spends, even though working capital borrowings to support the elongated cycle will keep debt levels high.


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