Commenting on this, Jayanta Roy, Senior VP and Group Head, ICRA Ratings, said: “Although concerns on the second wave of the pandemic are gathering pace across countries and this remains a key business risk, the recovery trajectory so far has been relatively better for the apparel exporters. Following the initial cancellations/ deferment of order offtake by some of the international buyers during March to May 2020, the faster opening up of economies and the resultant better recovery in retail sales in the international markets facilitated a relatively higher uptick in sales for apparel exporters in the subsequent months.”
Thus, while ICRA’s sample, comprising five mid-sized, listed, domestic branded apparel retail companies, reported a steep fall of ~84% in revenues in Q1 FY2021 on a Y-o-Y basis, its sample of five large, listed, garment-exporting companies reported a lower ~50% Y-o-Y contraction in revenues in Q1 FY2021.
Further, following a near standstill in April 2020 amid lockdowns, India’s apparel exports recovered in July and August 2020 to ~78% and ~86% of the levels seen in the corresponding months in the previous fiscal, while domestic retail sales are estimated to have been at ~40-50% of last year’s levels.
The impact has varied across companies, depending on several factors. While for apparel exporters, factors such as diversification across customers/ geographies and extent of performance pressures on key customers have been the key determinants, the impact on domestic retailers has varied, depending on factors such as strength of online presence, segments being catered to and presence in tier-II/ III cities and rural markets, which have performed better than metros and tier-I cities. Increased downtrading has been witnessed in the domestic market amid pressures on discretionary consumer spending, which, together with a faster sale recovery in tier-II/ III cities and rural markets, benefitted the brands catering to mass/ value segments. Having said that, pent up demand as well as expectations of healthy festive buying augur well for demand in the domestic market as well, in Q3 FY2021.
“Demand in H2 FY2021 is expected to gather support from extended online festive sales and further relaxations under Unlock 5.0 guidelines, effective from October 15, 2020 onwards. This apart, developments such as a rollback of the previously announced pay cuts by some corporate entities, the Government’s festive advance scheme etc. are also expected to result in improved cash flows in the hands of consumers, thereby supporting discretionary spending,” Mr. Roy added.
Nevertheless, the contraction in revenues projected for FY2021 is likely to translate into at least ~150-200 basis points correction in the operating profitability of apparel exporters in the current fiscal, while the decline is estimated to be much steeper, at a minimum of 600 bps for the domestic apparel retailers, as these companies have relatively higher fixed costs (in the form of employee costs and rental expenses). The impact on profitability is likely to be somewhat cushioned by the several cost rationalisation initiatives being undertaken by companies, including renegotiation of rental agreements and transition to revenue- share arrangements, employee-base optimisation, salary cuts etc.
Amid the shrinkage of profit margins and stretched operating cycles, dependence on debt during the year is expected to remain high and coverage metrics for the year are likely to weaken for apparel companies, more so for domestic apparel retailers.
For ICRA’s sample of domestic apparel retailers, interest cover is estimated to decline to multi-year lows, to ~1.5 times in FY2021(E) from over 10 times in FY2018 and FY2019 and ~4.5 times in FY2020. For the sample of apparel exporters, interest cover is estimated to moderate to ~3 times in FY2021(E) from ~3.3 times in FY2020 and ~5.8 times in FY2019.
After witnessing a major setback in the past two quarters owing to the Covid-19 pandemic, Indian apparel players are banking on the upcoming festive season to recover meaningfully from their all-time low sales. The apparel exporters have already witnessed an encouraging build-up in their order book position amid expectations of a spike in the festive season sales in the international markets. In its recent report titled – From disruption to the new normal: Indian apparel sector pins hopes on festive buying, ICRA projects the Indian apparel exporters to report a turnover decline of ~20-25% in FY2021, compared to a steeper ~30- 40% decline in revenues of companies focused on the domestic market. This follows a much steeper decline witnessed by apparel companies in H1 FY2021.
