Ready-made garment exporters resilient despite business slowdown: CRISIL.

A CRISIL study of 181 ready-made garment (RMG) players rated by it accounting for a fifth of India`s RMG exports by value reveals that these players are well equipped to tide over the challenges posed by the uncertain business environment. The ongoing economic crisis, and resultant dip in demand, especially in the Eurozone, a major export destination for RMG, may constrain revenue growth for most RMG exporters. However, CRISIL believes that its rated players will continue to outpace the industry on growth as in the past, despite the fact that they derive 80% of their revenues from exports. Their established customer relationships, cost efficiencies, and stable financial risk profiles will continue to drive their resilience to slowdown in business.

The RMG industry is highly fragmented, and exposed to risks relating to small scale of operations and customer concentration. Dependence on overseas (especially EU- and US-based) customers increases the industry’s vulnerability to the global economic conditions, and to fluctuations in currency rates. CRISIL-rated entities have, nevertheless, maintained a compound annual growth rate of 16% twice that of the industry in the five years through March 2011.

Says Gurpreet Chhatwal, Director, CRISIL Ratings, ``We expect the rated players to buck the industry trends, and maintain growth of 4 to 5% over the medium term, supported by their ability to closely align internal processes, quality standards, and delivery timelines to the stringent norms of clients. The clients, in turn, will benefit from cost economies of outsourcing to India, given its abundance of raw material and skilled labour.``

The rated players` stable financial risk profiles, sustained by steady margins and moderate capital structures, will also help them withstand decline in demand. Gearing may remain moderate and range-bound, at 2.0 to 2.2 times over the medium term, in the absence of significant capital expenditure (capex). The fact that debt consists largely of short-term working capital borrowings, will also support their financial risk profiles. Profitability will hold steady around the historical average of 8.5 to 9.5%, through appropriate input procurement and forex hedging measures.

Adds R Vasudevan, Head, CRISIL Ratings, ``We believe that the rated RMG exporters will maintain stable credit quality over the medium term, underpinned by comfortable financial risk profiles, and ability to withstand business turbulence, as they have done in the past five years, which includes the recession in 2008-09.``

CRISIL believes that the Technology Upgradation Fund Scheme, if extended beyond March 2012, will serve as a fillip to the RMG sector, and result in fresh capex over the medium term. Some players, especially those in niche RMG segments, and having strong linkages with buyers, may even undertake capacity expansions in the near term to capitalize on business opportunities presented by buyers` vendor-consolidation initiatives.

Source : myiris.com