A sharp fall in both domestic and export demand because of the COVID-19 pandemic will crimp garment makers’ revenue by 25-30 per cent, Crisil Ratings said.
Mumbai: Readymade garment (RMG) makers are likely to witness a 25-30 per cent decline in revenue in ongoing financial year due to the prolonged lockdown and lower discretionary spending, according to a report by Crisil Ratings.
A sharp fall in both domestic and export demand because of the COVID-19 pandemic will crimp garment makers’ revenue by 25-30 per cent, Crisil Ratings said.
For exporters, the fall will be more because of tepid discretionary spending in the US and European Union, which account for 60 per cent of India’s RMG exports, it said.
The working capital cycle of RMG makers has elongated because of higher inventory and stretched receivables, which is expected to impair their credit profiles, the report said.
The 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, which will add to the woes of exporters and will weaken credit profiles of some large global brick-and-mortar retailers, which will stretch receivables, it noted.
“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,” Crisil Ratings Director Gautam Shahi said.
“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 initiative,” he added.
Crisil Ratings Associate Director Kiran Kavala said 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,” she added.
Cash flows are likely to improve in the second half of this fiscal due to pick up in demand from third quarter as the festive season begins in India and winter season begins in export markets. It would put RMG makers in a better place to service debt obligations, the report said.
However, given the material impact of weak business performance in the first half, the ratios of net cash accrual to loan repayments and interest coverage will still be significantly weaker at 1.4-1.7 times and well below 3 times expected this fiscal, compared with 2.4 times and 4 times, respectively, in FY20, it added.
