Coronavirus lockdown | Apparel sector likely to witness 10-15% revenue loss in FY21: ICRA

In the wake of the rapid spread of COVID-19 pandemic that has brought demand to a standstill, revenues of Indian apparel players are likely to fall by at least 10-15 per cent in 2020-21, according to a report.

Although companies are likely to undertake some cost rationalisation measures such as employee base optimisation, pay cuts, promotional budget cuts and rental renegotiations, Icra in a report said that it expects high operating leverage, discounted sales to clear inventory backlog and bad debts to result in a shrinkage of their profit margins.

This will also impact the revenues of apparel players by 10-15 per cent in FY21 it added.

“With the 21-day domestic lockdown announced by the government from March 25 onwards to combat the spread of the virus, domestic apparel sales have come to a complete halt.

"Further, seven of India's top apparel export destinations, which account for nearly half of India's total apparel exports, are among the worst affected regions globally. With most of these regions resorting to lockdowns and social distancing, export demand for apparels has also fallen significantly,” Icra Senior Vice-President and Group Head, Corporate Sector Ratings, Jayanta Roy said.

The rating agency said it also expects an increase in the receivable turnover period as well as inventory pile-ups because of market lockdowns.

There are reports of international buyers deferring shipments and cancelling orders, till further notice, the report said, adding that as a result, the domestic apparel sector is witnessing significant turbulence and the ongoing Spring-Summer Season 2020 is likely to suffer a major setback.

On the supply side as well, social distancing and lockdowns have disrupted production in recent weeks, given the non-essential and labour-intensive nature of operations.

This apart, logistical issues are now affecting shipment of material ready for dispatch, it added.

Additionally, it said that while the companies are negotiating with the customers on a likely delivery schedule and not all orders are likely to get affected, the extent of the impact will depend on the developments on the COVID-19 front, and its economic impact on the companies across regions.

These factors are likely to add to the liquidity pressures for companies in the near term as a result, the cushion in drawing power and working capital limits is going to be crucial.

Because of the liquidity pressures in the near term, apparel entities are expected to rely on increased borrowings to tide over immediate liquidity pressures.

In this context, RBI announced a relief package on March 27, to ensure continuity of viable businesses. Besides others, these included allowing lenders to extend a three-month moratorium on payment of term loan instalments and interest on working capital to entities, and recalculate drawing power by reducing the margins and/or by reassessing the working capital cycle.

With respect to liquidity, ICRA noted that the RBI's announcements dated March 27, are likely to provide some much-needed cushion to the companies.

These steps will also give some time to companies to plan and react to the recent developments as well as recover from the immediate impact.

"However, we expect the immediate impact of COVID-19 to be Negative on the sector. The timing and extent of the recovery are uncertain as of now and will remain a key monitorable for the sector,” Roy said.

The immediate impact aside, even after the spread of the virus is contained, Icra expects a prolonged impact on the sector, with recovery likely to be gradual over several months.

On the demand side, consumer scepticism to visit crowded places initially could keep footfalls subdued in offline retail, even after the lockdown ends.

Also, overall pressure on corporate performance, which could trigger further job losses and pay cuts across sectors, as well as the overall stress in the economy are likely to affect buying power, which would affect discretionary consumer spending in the near term, resulting in the deferment of purchases, thus affecting demand for the segment.

“Notwithstanding the impact expected on the sector's performance in the near term, we expect limited reliance on term borrowings and RBI's recent initiatives to cushion the impact on the sector,” Roy added.