Economy

Slack demand to crimp garment makers’ revenues by 25-30%, says Crisil report

Mumbai | Updated on July 31, 2020 Published on July 31, 2020

The credit profiles of readymade garment (RMG) makers are expected to be impaired this fiscal due to a sharp fall in both domestic and exports demand due to the Covid-19 pandemic.

The lower profitability and elongation of working capital cycle are other reasons, according to a Crisil Ratings report.

The impact will be felt more by exporters owing to higher revenue de-growth and stretched receivables. The prolonged lockdown and lower discretionary spending are expected to reduce the revenue of RMG makers by 25-30 per cent this fiscal.

For exporters, the fall will be more because of tepid discretionary spending in the US and European Union (accounting for about 60 per cent of India’s RMG exports).

“Over the past five fiscals, revenue growth of RMG makers was supported by domestic demand even as exports were muted. This fiscal, with domestic demand also falling significantly, revenues are expected to be materially impacted. Consequently, their operating margins are expected to contract 250-300 basis points (bps) to 7-7.5 per cent for the sample set, despite softer cotton prices, and cost-reduction initiatives,” Gautam Shahi, Director at Crisil Ratings, said.

Further, their working capital cycle has elongated because of higher inventory and stretched receivables. Last fiscal ended with 20-25 per cent higher inventory as the Covid-19 pandemic took hold and lockdowns began in late March.

With demand depressed in the first half of this fiscal, inventories will remain high, it added.

Adding to the woes of exporters will be weakening credit profiles of some large global brick and mortal retailers, which will stretch receivables.

“A sharp fall in profits means RMG makers will not have sufficient cash accruals to meet repayment obligations in the first half of this fiscal. But they are expected to utilise the cushion available in their working capital facilities, and will be helped by the moratorium on loan repayments, the Government relief package to micro, small and medium enterprises, and the Covid-19 emergency credit lines,” Kiran Kavala, associate director at Crisil Ratings, said.

Cash flows are likely to improve in the second half of this fiscal due to pick-up in demand from the third quarter as the festival season begins and fall/winter season begins in the export markets.

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Published on July 31, 2020
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