Indian apparel-exporting companies are expected to mark a mild 2-3 percent year-on-year (YoY) increase in revenues to Rs. 27,255 cr for fiscal 2024 (FY2024), as per ICRA. Despite a tepid demand environment in the first half (H1) of FY2024, the end demand is anticipated to improve in H2 FY2024, boosting revenues.
The retail apparel brands in the US and the European Union (EU), which together account for close to 55 percent of global apparel trade, are expected to liquidate the high inventory build-up of FY2023 and book their orders for the Spring/Summer 2024 season in H2 FY2024. The outlook for the apparel industry remains stable, ICRA said.
“ICRA expects the apparel-exporting companies to report a nominal increase in revenues in FY2024 with a recovery in growth rate in FY2025. Despite a rationalisation in raw material costs in H1 FY2024, the benefit is expected to be passed on to the orders executed, considering a weak operating environment at present. The long-term growth prospects however look encouraging, with the government of India’s various promotional steps, including the PLI schemes, the PM MITRA parks, the proposed FTAs with the UK and the EU, and the longer-term benefit of China Plus One shift in apparel sourcing,” said Kaushik Das, Vice President and Co-Group Head, Corporate Sector Ratings, ICRA.
For FY2024, ICRA expects the sample set to report ~2-3 percent revenue growth, led by an expected recovery in demand conditions in the international markets during H2 FY2024. The operating margins may slightly moderate to 9.0-9.5 percent in FY2024 (10.9 per cent in FY2023), on a relatively weaker operating environment in H1 FY2024, steeper raw material prices, and higher employee expenses. Indian cotton yarn prices had averaged ~19 percent higher in FY2023 compared to the past five-year average. However, between April and July 2023, average cotton yarn prices were ~24 percent lower than the average cotton yarn prices in FY2023, while remaining elevated. Nevertheless, the stability of export incentives, together with the benefits of higher scale, should help the companies cushion the impact on profitability.
A difficult operating environment had pushed back large capex investments for most players, except a brown field expansion by one player. However, based on an expectation of demand revival from H2 FY2024, industry players’ strategies to take advantage of the China Plus One movement, and to capitalise on the PLI incentives (especially in the man-made fibre or MMF value chain), ICRA expects a pick-up in capex spending in FY2025.
Despite the expected increase in debt, the coverage ratios of the sample set are expected to remain stable as earnings improve. ICRA’s sample set of apparel-exporting companies is likely to report an interest cover of ~5.7-6 times and total debt/ OPBDITA of ~1.8-1.85 times in FY2024 and FY2025, respectively (compared to ~5.6 times and ~1.9 time respectively, in FY2023).
Out of the approved 64 applicants for the PLI 1.0 scheme in April 2022, 56 applicants completed the mandatory criteria for formation of a new company and approval letters have been issued. On July 18, 2023, the government of India reopened the PLI 1.0 scheme portal till August 31, 2023, and on August 31, 2023, the government extended it till October 31, 2023. In addition to the fresh capacity additions under the PLI, the PM Mega Integrated Textile Region and Apparel (MITRA) schemes will strengthen India’s presence in the global apparel trade, by providing scale benefits and strengthening the country’s presence in the MMF value chain. ICRA anticipates the culmination of these schemes to enable the Indian apparel exporters to capture a greater share of the Chinese apparel export market.
While volumes rose by a tepid 1 percent in FY2023, the depreciation of the rupee against the USD by ~8 percent, supported an ~8.8 percent expansion in exports in FY2023 INR terms. Subsequently, Indian apparel exports declined by a sharp 17.8 percent to $3.7 bn in Q1 FY2024 on a YoY basis.
“The overall share of the EU, which accounts for ~31 percent of global apparel trade, improved to ~32 percent in FY2023 from ~28 percent in FY2022 in Indian apparel exports. Therefore, successful conclusion of the ongoing FTA discussions with the UK and the EU, along with the FTA agreement signed with Australia, which came into force by end-December 2022, is likely to provide a growth impetus to Indian apparel exports, going forward,” Das reiterated.
