Revenue of readymade garment (RMG) manufacturers is set to grow by 8-10 per cent this fiscal on healthy domestic demand, revival in exports driven by lower cotton prices and easing supply chain disruptions, said a report by CRISIL Ratings. Volume growth, it said, will be higher at 6-8 per cent this fiscal, compared with 3-5 per cent last fiscal. Despite this, revenue will grow slower than last fiscal’s ~14 per cent as realisations moderate due to easing raw material prices.
Meanwhile, the report stated that the prices of cotton and manmade fibre are expected to fall by 15-17 per cent and 8-10 per cent on-year this fiscal, respectively. And consequently, it added, growth in realisations will be a meagre 1-3 per cent this fiscal, in comparison to 10 per cent last fiscal.
According to CRISIL, the credit outlook for RMG manufacturers remains stable, driven by steady operating performance and healthier balance sheets amid low capital expenditure (capex) intensity and stable working capital requirement. The firm analysed 146 CRISIL-rated RMG makers with an aggregate revenue of ~Rs 42,000 crore to reach the findings of the report.
Gautam Shahi, Director, CRISIL Ratings, “RMG makers will rely on domestic consumption (~75 per cent of overall RMG demand), which is expected to grow 6-8 per cent in volume terms this fiscal. Lower inflation levels and stable economic growth are key to healthy discretionary spending by consumers domestically. On the other hand, volume of exports (~25 per cent of RMG demand) will grow 4-6 per cent this fiscal on-year on a low base, led by restocking by global retailers, softer prices of cotton (the key raw material for RMG) and a slow but gradual pick-up in consumption in overseas markets.”
Volume of exports fell 7 per cent on-year last fiscal following a sharp rise in domestic cotton prices and moderation in demand from the United States and the European Union, which account for ~60 per cent of it.
This fiscal, higher domestic and export volume and lower cotton prices will help expand operating margin by 50 basis points (bps) on-year to 9.5 per cent, CRISIL said.
In contrast, operating margin had shrunk 150 bps last fiscal due to elevated cotton prices, delayed price hikes in the domestic market, and lower offtake by global retailers amid inventory pile-up.
Sehul Bhatt, Associate Director, CRISIL MI&A Research, said, “Driven by improvement in both revenue and profitability, net cash accrual of RMG makers will grow by 20-22 per cent (on-year) this fiscal. Moreover, capital expenditure (capex) and working capital requirements are expected to remain moderate, in line with the past few fiscals, thus supporting the balance sheets and overall credit profile of the sector.”
Gearing, which has improved over the past three fiscals due to healthy cash accrual and low capex, is likely to improve further to 0.45 time this fiscal from 0.56 time as on March 31, 2023. Interest coverage will exceed 4 times this fiscal, compared with 3.5 times last fiscal. That said, CRISIL stated, any change in consumer discretionary spending domestically due to below normal monsoon or a slowdown in exports due to any global headwinds will bear watching.