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Apparel exports expected to improve from H2 FY2024: ICRA

ICRA has recently published a research note on the Indian apparel export industry. The rating agency expects its sample companies to report a mild 2-3% YoY increase in revenues to Rs. 27,255 crore for FY2024, the company announced in a release on Thursday.

Despite a tepid demand environment in H1 FY2024, ICRA expects the end demand to improve in H2 FY2024, boosting revenues. The retail apparel brands in the US and the EU, which together account for close to 55% of global apparel trade, are expected to liquidate the high inventory build-up of FY2023 and book their orders for the Spring/Summer 2024 season in H2 FY2024.

“ICRA expects the apparel-exporting companies to report a nominal increase in revenues in FY2024 with a recovery in growth rate in FY2025. Despite a rationalization in raw material costs in H1 FY2024, the benefit is expected to be passed on to the orders executed, considering a weak operating environment at present,” Kaushik Das, Vice President & Co-Group Head, Corporate Sector Ratings, ICRA said.

“The long-term growth prospects however look encouraging, with the Government of India’s various promotional steps, including the PLI schemes, the PM Mitra parks, the proposed FTAs with the UK and the EU and the longer-term benefit of China Plus One shift in apparel sourcing,” Das added.

The operating margins may slightly moderate to 9.0-9.5% in FY2024 (10.9% in FY2023), on a relatively weaker operating environment in H1 FY2024, steeper raw material prices, and higher employee expenses.

Indian cotton yarn prices had averaged ~19% higher in FY2023 compared to the past five-year average. However, between April and July 2023, average cotton yarn prices were ~24% lower than the average cotton yarn prices in FY2023, while remaining elevated.

According to the release, a difficult operating environment had pushed back large capex investments for most players, except a brownfield expansion by one player. However, based on an expectation of demand revival from H2 FY2024, industry players’ strategies to take advantage of the China Plus One movement, and to capitalise on the PLI incentives (especially in the man-made fibre or MMF value chain), ICRA expects a pick-up in capex spending in FY2025.

Despite the expected increase in debt, the coverage ratios of the sample set are expected to remain stable as earnings improve. ICRA’s sample set of apparel-exporting companies is likely to report an interest cover of ~5.7-6 times and total debt/ OPBDITA of ~1.8-1.85 times in FY2024 and FY2025, respectively (compared to ~5.6 times and ~1.9 time respectively, in FY2023).

Out of the approved 64 applicants for the PLI 1.0 scheme in April 2022, 56 applicants completed the mandatory criteria for formation of a new company and approval letters have been issued.

In addition to the fresh capacity additions under the PLI, the PM Mega Integrated Textile Region and Apparel (MITRA) schemes will strengthen India’s presence in the global apparel trade, by providing scale benefits and strengthening the country’s presence in the MMF value chain. ICRA anticipates the culmination of these schemes to enable the Indian apparel exporters to capture a greater share of the Chinese apparel export market.

While volumes rose by a tepid 1% in FY2023, the depreciation of the rupee against the USD by ~8%, supported an ~8.8% expansion in exports in FY2023 INR terms. Subsequently, Indian apparel exports declined by a sharp 17.8% to USD 3.7 billion in Q1 FY2024 on a YoY basis.

“The overall share of the EU, which accounts for ~31% of global apparel trade, improved to ~32% in FY2023 from ~28% in FY2022 in Indian apparel exports. Therefore, successful conclusion of the ongoing FTA discussions with the UK and the EU, along with the FTA agreement signed with Australia, which came into force by end-December 2022, is likely to provide a growth impetus to Indian apparel exports, going forward,” Das said.


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