Despite softer cotton prices, revenues of Indian garment makers are set to decline by 25%-30% this fiscal year due to covid’s impact on demand, according to rating agency CRISIL.
The impact will be felt more by garment exporters due to stretched receivables and tepid discretionary spending in the US and the European Union, according to an analysis of 180 companies in the sector.
“Over the past five fiscals, revenue growth of readymade garment makers was supported by domestic demand even as exports were muted. This fiscal, with domestic demand also falling, revenues are expected to be materially impacted,” said Gautam Shahi, director at CRISIL Ratings.
Consequently, their operating margins are expected to contract by 200-300 basis points to 7-7.5%, he added.
Inventories increased by 25%-30% in the last fiscal year ended March as the covid-19 pandemic took hold, leading to a lockdown. With demand depressed in the first half of this fiscal, the stock levels are likely to remain high.
Garment makers may not have sufficient cash available to even meet repayment obligations in the first half of this fiscal, says Kiran Kabala, associate director at CRISIL Ratings.
Cash flows are likely to improve during the second half of the fiscal year due to festival season demand as well as an uptick in fall/winter season demand from overseas seen every year.
Given the depreciation of the rupee against the dollar and the euro, whether there are higher incentives are given to exporters will be a key factor to monitor, according to CRISIL