For Indian RMG players, 2nd wave unstitches revenue recovery: CRISIL

05 Jun '21

3 min read

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The second wave of COVID-19 has unstitched demand recovery in India’s readymade garments (RMG) sector, which is expected to grow at 15-20 per cent in this fiscal, or almost half the 28-33 per cent expected earlier, according to rating agency CRISIL. Domestic demand, which accounts for almost three quarters of overall demand, has been severely affected by fresh curbs imposed in states to contain the pandemic.

Consequently, demand recovery to pre-pandemic levels is expected to be pushed back by at least a fiscal. CRISIL said in a press release.

But higher revenues this fiscal, supported by buoyant export demand, higher profitability and improving working capital management, will benefit credit profiles, an analysis of over 140 CRISIL-rated RMG companies with aggregate revenue of close to ₹20,000 crore shows.

Significantly, this revenue growth would come on a low base, after an expected tumble of 23-25% last fiscal.

Domestic demand had started recovering in the second half of the last fiscal after lockdowns and other restrictions, which crimped first-half revenue. However since the fierce second wave landed in the first quarter of this fiscal, curbs have been re-imposed, slowing demand recovery.

On the other hand, export demand, which accounts for 26 per cent of the revenue pie, has remained healthy, and should log 18-22 per cent growth compared with a 16 per cent contraction in the last fiscal, because of improving discretionary spending in the United States and Europe, which account for nearly 60 per cent of India’s RMG exports.

Therefore, revenue growth for the industry is seen at 15-20 per cent this fiscal, which will support operating leverage. CRISIL Ratings expects an improvement in operating profitability by 75-100 basis points (bps) on-year to 5.5-6 per cent this fiscal. That will still be lower than the 8-9 per cent seen between fiscals 2015-16 and 2018-19.

During the first wave, RMG makers had significantly cut promotion and travel expenditure, which should support profitability in the current fiscal as well.

The working capital position of RMG makers is also expected to rebound close to pre-pandemic levels this fiscal, helped by prudent inventory management and normalisation of the debtor cycle. Gross current assets could revert to pre-pandemic levels of almost 180-190 days after increasing by 15-20 days last fiscal, when extension of credit period to customers stretched the working capital cycle.

Any extension of lockdown beyond the first quarter will impact domestic RMG sales, while resurgence of infections in key export markets will bear watching, the rating agency added.

Fibre2Fashion News Desk (DS)

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