The rating agency said that the recovery will be supported by the opening up of economies and markets, improved consumer confidence levels and continued pick up in discretionary spending. This builds on the growth in the recent months which had been supported by pent-up demand and onset of festive buying.
Elaborating on this, Mr. Jayanta Roy, Senior Vice President & Group Head, Corporate Sector Ratings, ICRA, said, “Even though the recovery is in a nascent stage and impact of the pandemic continues, the textile sector appears to be on a firm footing with the worst of the pandemic impact behind us, and favourable progress on vaccination rollouts. As demand continues to normalise in domestic as well as export markets, we expect the textile sector performance to recover to pre-Covid levels in FY2022 at a broader level. Accordingly, ICRA’s textiles sector outlook for FY2022 is stable.”
After witnessing a major setback in Q1 FY2021 following the Covid-19 pandemic and the ensuing lockdowns, the domestic textile sector started reporting a gradual recovery from Q2 FY2021 onwards, supported by opening up of the markets and resumption of activity across the value chain. The recovery was seen to be faster in the export markets vis-à-vis the domestic market, as economies of key buying regions opened up faster, facilitating better performance for spinning and apparel segments, which have greater reliance on export markets. Though with a lag, domestic textile sales also picked up pace supported by pent up demand, pick-up in online sale activity and reduced consumer skepticism to step out and shop.
Commenting on this, Ms. Nidhi Marwaha, Vice President& Co-Head, Corporate Sector Ratings, ICRA, said, “Notwithstanding the broader recovery, growth in some segments involving discretionary spends/ aspirational buying such as formal/ party wear and mid to high-value casual wear, is likely to remain lower vis-à-vis other essential product categories such as active/lounge wear and affordable-to-medium value casual apparels, given the shift witnessed in consumer usage and preferences. Within fabrics, the cotton knitted fabric segment as well as blended fabrics are likely to perform better, given their higher usage in casual/ lounge wear.”
The recovery in demand for apparels is likely to trickle down the entire value chain. For cotton spinners, besides improvement in domestic demand with recovery in the downstream segments, competitive domestic cotton prices are supporting export demand. Manmade yarn manufacturers are additionally benefitting from downtrading, increased preference for low-value items and better demand for segments such as active wear/ lounge wear, besides improved competitiveness of polyester staple fibre (PSF) vis-à-vis cotton.
Based on an analysis for samples of large, listed players across segments, ICRA expects cotton spinning and apparel export segments to report relatively lower contraction in FY2021 vis-à-vis other segments (including fabrics and domestic apparels), considering higher dependence of these segments on exports. Similarly, recovery is slated to be faster for these segments in FY2022. Revenues for the cotton spinning and the apparel export segments in FY2022 are likely to grow by 15-20%, following a contraction in mid-teens, estimated for FY2021.
While operating margins for spinners are likely to revert closer to pre-Covid levels, those for apparel exporters may remain marginally lower than the pre-Covid levels amid a competitive operating environment, wherein buyers could be expected to negotiate for steeper discounts. While interest cover for the sample of cotton spinners is likely to improve to 6x in FY2022from 4x in FY2021, that for apparel exporters is likely to improve to 4.2x in FY2022 to 3.5x in FY2021. In terms of leverage, Debt/ OPBDITA for the cotton spinners in ICRA’s sample is expected to moderate to ~2.4x in FY2022, from 3.9x in FY2021. For apparel exporters, Debt/ OPBDITA is estimated to decline to 2.7x in FY2022 from 3.5x in FY2021.
For fabric and domestic apparel categories, the revenue growth in FY2022 is projected at 30-35% and 35-40% respectively, with these segments estimated to report steeper contraction vis-à-vis other segments (by ~25-30% and 35-40% respectively) in FY2021. Recovery in operating profitability is expected to be slower for domestic apparel category amid continued steep discounting, as companies focus on liquidating unsold, brought-forward inventories and scale remains marginally lower than pre-Covid levels, even as fixed costs such as rentals and employee expenses revert to normal levels. Nevertheless, with recovery, while the interest cover for the sample of fabric manufacturers is likely to improve to 2.5x in FY2022 from 1.1x in FY2021, that for domestic apparel retailers is likely to improve to 3.1x in FY2022 from1.5x in FY2021.Debt/ OPBDITA for fabric and domestic apparel segments is expected to decline to 4.1x and 2.5x respectively in FY2022, after touching multi-year highs of 8.5x and 5.2x respectively in FY2021.