How readymade garment makers are hit by the Covid-19 pandemic
One of the worst-hit business sectors in the pandemic is textiles, and within that segment, garment makers, especially those who were betting on exports. A sharp fall in domestic and exports demand due to Covid-19, lower profitability, and elongation of the working capital cycle will impair the credit profiles of readymade garment makers this fiscal, says a note from Crisil. The impact will be felt by exporters owing to higher revenue degrowth and stretched receivables, an analysis of more than 180 Crisil-rated readymade garment manufacturers (representing revenue of around Rs 40,000 crore) shows.
The lockdown and lower discretionary spending will reduce the revenue of readymade garment makers by 25-30 per cent this fiscal. For exporters, the fall will be more because of tepid discretionary spending in the US and European Union (accounting for nearly 60 per cent of India’s readymade garment exports). “Over the past five fiscals, revenue growth of readymade garment makers was supported by domestic demand even as exports were muted, “says Gautam Shahi, director, Crisil Ratings. This fiscal, with domestic demand also falling significantly, revenues are expected to be materially impacted. “Consequently, their operating margins are expected to contract 250-300 basis points (BPS) to 7-7.5 per cent for the sample set, despite softer cotton prices, and cost-reduction initiatives.” Further, their working capital cycle has elongated because of higher inventory and stretched receivables. Last fiscal ended with 20-25 per cent higher inventory as the Covid-19 pandemic took hold and lockdowns began in late March. With demand depressed in the first half of this fiscal, inventories will stay high. There will be weakening credit profiles of some large global brick & mortar retailers, which will stretch receivables. A sharp fall in profits means readymade garment makers won’t have sufficient cash accruals to meet repayment obligations in the first half of this fiscal. But they are expected to utilise the cushion available in their working capital facilities and will be helped by the moratorium on loan repayments, the government relief package to micro, small and medium enterprises, and the Covid-19 emergency credit lines. Cash flows may improve in the second half of this fiscal due to pick-up in demand from the third quarter as the festive season begins in India and winter season begins in the export markets.
(Courtesy of Mail Today)
Also read: How Covid-19 is hurting MSME bottomlines