ICRA expects Indian apparel exporters to report moderate profits in FY20, with pressures likely to sustain at least in the near term, and turnover growth to be subdued, except for a few larger players with an established client base. The industry is facing numerous challenges like increased bargaining power of buyers amid intense competition, cost-side pressures emanating from disruptions in procurement of raw materials and consumables (such as colours, chemicals, accessories/trims etc) from China and write-backs of export incentives booked previously – all of which are expected to adversely impact profitability.
Exporters facing internal, external pressures
As per Jayanta Roy, Senior Vice-President and Group Head, Corporate Sector Ratings, ICRA, “In addition to sustained pressures on liquidity owing to delays witnessed in clearance of the government dues, we expect a correction of around 100-150 bps in the operating profitability of Indian apparel exporters in FY2020, which is expected to result in a moderation in debt coverage metrics. The impact is likely to be more pronounced for leveraged and smaller companies, with limited bargaining power with customers, modest liquidity cushion and/or less financial flexibility to absorb the impact.”
Indian apparel exporters are passing through testing times, with several internal and external challenges. External issues primarily stem from an unfavourable demand-supply scenario. Demand in key markets remained subdued, with impact heightened by the rapid spread of COVID-19 across regions in recent weeks. While demand from the EU remained weak, recent trends in the US apparel imports have also been discouraging, corroborated by a volumetric decline of 12 per cent Y-o-Y in apparel imports by the US in Q3 FY20 and an overall decline of 0. per cent Y-o-Y in nine months FY20. This follows an 17 per cent and 5 per cent Y-o-Y decline in domestic retail sales of clothing and clothing accessories (in value terms) in the US in Q3 FY20 and nine moths FY2020 respectively. Besides affecting order flows, this could potentially result in renegotiation of realisations as well as an elongated receivables cycle for the exporters. Further, competition from peer nations is intensifying with increasing penetration of free trade agreements (for instance, Bangladesh has duty-free access to the EU markets under the Everything but Arms scheme, while the EU-Vietnam Free Trade Agreement is in advanced stages of execution, tilting the market in their favour.
While external challenges are proving to be growth headwinds for companies, internal challenges are constraining profitability and liquidity of players across the spectrum. These pertain to recent retrospective revision in and continued uncertainty on structure of export incentives as well as delays in clearance of previous dues and input credit refunds.
