The rapid spread of the Covid-19 pandemic across countries is expected to pull down apparel companies’ revenue by 10-15 per cent next fiscal, on top of a mute growth this fiscal due to lacklustre demand in both the domestic and export markets.
International buyers have deferred shipments and cancelled orders till further notice. As a result, the domestic apparel sector is witnessing a significant turbulence and the ongoing spring-summer season is likely to suffer a major setback.
Given the non-essential and labour-intensive nature of operations, most textile companies have stopped production. This apart, logistical issues are now affecting shipment of material ready for dispatch.
Shrinking profits
Jayanta Roy, Group Head, Corporate Sector Ratings, ICRA, said apparel sales have come to a complete halt with the 21-day lockdown announced by the government to combat spread of coronavirus.
Further, apparel export has also fallen significantly, with seven top export destinations — which account for nearly half of India’s total exports — being among the worst affected regions globally, resorting to lockdowns and social distancing, he said.
Although companies are likely to undertake some cost rationalisation measures, ICRA expects high operating leverage, discounted sales to clear inventory backlog and bad debts to result in a shrinkage of profit margins.
The rating agency also expects an increase in credit timeline and inventory pile-up because of market lockdowns. Additionally, order cancellations and a prolonged impact of Covid-19 could result in inventory obsolescence, necessitating write-offs and discounted sales.
Debt coverage metrics of apparel companies are likely to turn moderate, with pressure on revenues and profits. However, the package announced by the RBI will ensure continuity of viable businesses.
Immediate impact
The announcements made the RBI may provide a much-needed cushion to companies. These steps will also give some time to companies to plan and react to the recent developments.
However, ICRA expects the immediate impact of Covid-19 to be negative on the sector as the timing and extent of the recovery are uncertain, said Roy.
Even after the virus spread is contained, the rating agency expects the recovery to be gradual over several months, as consumer skepticism to visit crowded places initially could keep footfalls subdued in offline retail, even after the lockdown ends.
Also, overall pressure on corporate performance, which could trigger further job losses and pay cuts across sectors, is likely to affect buying power, which would affect discretionary consumer spending in the near term.