China Constraints, Sri Lankan Problems To Drive Indian Exports Of Garments

Normalising discretionary spends, higher realisations, and sustained export demand, including due to higher opportunities following supply chain issues at Sri Lanka and China, will drive up the revenue of ready-made garment (RMG) makers by 16-18% this fiscal. That would follow a strong growth of around 18-20% in fiscal 2022, albeit on a low base of fiscal 2021, caused by the advent of Covid-19.

Operating margin of RMG makers should improve by 75-100 basis points on-year to 7.5-8.0% this fiscal, though still lower than the pre-pandemic levels of 8-9%. Profitability will be supported by partial pass-through of higher input prices and better operating leverage. Besides, the depreciation of the rupee1 and continuation of export-linked incentive schemes will be added advantages for export players in the road ahead, shows an analysis of 140 RMG makers rated by CRISIL Ratings, with aggregate revenue of Rs ~20,000 crore.

Consequently, stronger operating profits and marginal improvement in working capital intensity will support the debt protection metrics in the current fiscal, lending stability to their credit profiles.

Says Anuj Sethi, Senior Director, CRISIL Ratings, "Domestic demand, which accounts for three-fourths of the overall RMG demand, is expected to grow over 20% on recovering discretionary spends and improving realisations amidst the surge in raw material prices. Export demand is expected to grow at least by 12-15%, despite the higher base of last fiscal, as overseas players continue to diversify their supplier base in light of the economic crisis in Sri Lanka and the fresh Covid wave in China, which has disrupted supply-chains."

While key raw materials such as cotton yarn and man-made fibre are 15-20% dearer, RMG makers should be able to partially pass on input price hikes on demand rebound, and improved operating leverage, which will support overall profitability.

Incremental working capital requirement, however, will increase only marginally because of expected improvement in the working capital cycle for these RMG players. For instance, receivable days, which got elongated to ~90 days during the pandemic period, is expected to move close to the pre-pandemic levels of 70-75 days.

The credit profiles of CRISIL rated RMG players already witnessed good improvement in fiscal 2022, with the ratio of upgrades to downgrades, or credit ratio rising to 2.5 times in fiscal 2022 from 0.2 time in fiscal 2021

Though the demand in fiscal 2023 will remain healthy, RMG players still have adequate unutilised capacities and as a result capital spends are not expected to be high.

Says Aditya Jhaver, Director, CRISIL Ratings, "Higher operating profit, on one hand, and expected improvement in the working capital cycle, along with only routine capital spends will keep debt levels under control, enabling gradual improvement in debt metrics in fiscal 2023. This will lend stability to credit profiles of CRISIL Rated RMG players. For instance, interest coverage of these players is expected over 3 times in fiscal 2023 compared with 2.5-3.0 times in fiscal 2022, though may still remain lower than the pre-pandemic level of 3.0-3.5 times."

Any fresh waves of the pandemic or change in customer uptake in light of increasing raw material prices will remain key monitorables.