Indian apparel exporters would report a moderation in profitability in FY20, with pressures likely to sustain at least in the near term, and turnover growth to be subdued except for a few larger players with an established client base, said an Icra report on Tuesday.
The industry is facing increased challenges such as bargaining power of buyers amid stiff competition, cost-side pressures from disruptions in procurement of materials and consumables (such as colours, chemicals, accessories/trims) from China and write-backs of export incentives booked previously – all of which are expected to adversely impact profitability, said an ICRA analysis.
Apparel exporters are going through several internal and external challenges. The external issues stem from an unfavourable demand-supply scenario. Demand in the key markets has remained subdued, with impact heightened by COVID-19 outbreak. While demand from the European Union has remained weak, recent trends in the US apparel imports have also been discouraging, corroborated by a volumetric decline of 12% year-on-year in apparel imports by the US in Q3 FY20 and an overall decline of 0.3% y-o-y in 9M FY20.
This follows a 17% and 5% y-o-y decline in domestic retail sales of clothing and clothing accessories (in value terms) in the US during Q3 FY20 and 9M FY20, respectively. Besides affecting order flows, this could potentially result in renegotiation of realisations as well as an elongated receivables cycle for the exporters. Further, the competition from peer nations is intensifying with increasing penetration of free trade agreements tilting the market in their favour, the ICRA analysis said.
According to the analysis, while external challenges are proving to be growth headwinds for firms, internal challenges are constraining profitability and liquidity of players. These pertain to recent retrospective revision in and continued uncertainty on structure of export incentives as well as delays seen in the clearance of previous dues and input credit refunds.
Jayanta Roy, senior vice-president and group head, corporate sector ratings, ICRA, said: “In addition to sustained pressures on liquidity owing to delays witnessed in clearance of the government dues, we expect a correction of around 100-150 bps in the operating profitability of Indian apparel exporters in FY20, which is expected to result in a moderation in debt coverage metrics. The impact is likely to be more pronounced for leveraged and smaller companies, with limited bargaining power with customers, modest liquidity cushion and/or less financial flexibility to absorb the impact.”
Export incentives have played a crucial role in supporting the competitiveness of domestic apparel exporters in the international markets. Accordingly, this remains a key monitorable for the sector as the recent coronavirus outbreak is likely to encourage major international buyers to diversify their sourcing base for reducing dependence on China, which accounts for over 30% of the global apparel trade.
Correction in profitability follows a clarification issued by the Union government in January 2020 on the structure of export incentives available to exporters in the current fiscal, which resulted in material change with retrospective effect. While exporters factored in the export incentive benefits under the Rebate of State and Central Taxes and Levies (RoSCTL) scheme and the Merchandise Exports from India Scheme (MEIS) from March 2019 till December 2019, the MEIS scheme was discontinued with retrospective effect from March 2019 onwards. This has necessitated a write-back of export incentives already booked in the orders shipped during the current fiscal, affecting profitability.
Source: financialexpress.com