Domestic footwear industry’s revenues are expected to moderate to about 7-8 per cent in FY24 due to sluggish volume growth with no significant increase in average selling price (ASP) expected in the coming quarters, as per a report by ICRA. This comes at a time when the mass segment is facing headwinds and its demand is unlikely to improve significantly in the near term, the report noted.

Priyesh Ruparelia, Vice President and Co-Group Head, Corporate Ratings, said, “Elevated inflation remains a drag on the mass segment products, thus prolonging the deceleration that started from Q4 FY2023. The footwear entities were unable to undertake any major price hikes in the last 2-3 quarters. After a stagnant performance in Q1 FY2024, the total revenue is unlikely to improve significantly in Q2 FY2024.“

“While some recovery is expected in H2 FY2024, with the onset of the festive and wedding seasons, the overall revenue growth is likely to moderate sharply to about 7-8 per cent in FY2024 from the high 28 per cent in FY2023. However, companies with major focus on the premium segment will continue to perform well,” he added,

Raw material prices

Softening of raw material prices did support the operating margin (OPM) in H1 FY2024. But increasing raw materials prices since August 2023 is likely to impact the margins in H2 FY2024. “Consequently, the OPM is expected to remain flat at ~18.5 per cent in FY2024,” the report added.

Recently, Centre implemented quality control order (QCO) pertaining to around 24 footwear and related products with effect from July 1 for the large and medium scale entities. “However, for some products, where the standards have been recently amended, the applicability was revised to December 31, 2023. Since a significant portion of the revenues of the organised footwear entities are concentrated around those products, the major impact of the QCO implementation would be visible from January 2024,” it noted adding that it could lead to a supply disruption in the near term as the players adjust to the new regulatory regime. But the report added that in the long term it will lead to the formalisation of the footwear industry.

Footwear players also increased imports in April-June period, in anticipation of the supply disruption, resulting in front-loading of inventory on entities’ books. “While the imports moderated in July 2023 following the deferred implementation of QCO guidelines for major products, the working capital requirements are likely to remain high in the near-term,” ICRA noted.

 “While the revenue growth is expected to remain muted, the financial position of footwear players in the ICRA sample will remain strong with healthy on-balance sheet liquidity and low financial leverage. The companies are aggressively expanding in tier-3 towns and rural areas through the franchisee route as well as improving their online penetration, thus limiting their own capex requirements,” ICRA report added.