A sharp fall in both domestic and exports demand because of the COVID-19 pandemic, lower profitability and elongation of working capital cycle are expected to impair the credit profiles of Indian readymade garment (RMG) makers this fiscal, according to CRISIL Ratings, which recently said the impact will be felt more by exporters owing to higher revenue de-growth and stretched receivables.
The company analysed over 180 RMG manufacturers.A sharp fall in both domestic and exports demand due to the COVID-19 pandemic, lower profitability and elongation of working capital cycle may impair the credit profiles of Indian readymade garment makers this fiscal, according to CRISIL Ratings, which said 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 United States and the European Union.
“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% for the sample set, despite softer cotton prices, and cost-reduction initiatives,” company director Gautam Shahi said in a press release.
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 pandemic took hold and lockdowns began in late March.
With demand depressed in the first half of this fiscal, inventories will remain high. Adding to the woes of exporters will be weakening credit profiles of some large global brick and mortal retailers, which will stretch receivables.
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 festive season begins in India and fall/winter season begins in the export markets. That would put RMG makers in a better place to service debt obligations.
Fibre2Fashion News Desk (DS)
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