Indian footwear industry revenue is striding ~11 per cent ahead this fiscal year on higher realisations with volume up ~4 per cent, said an analysis by CRISIL Ratings. Operating margin, it said, is expected to expand by about 125 basis points to ~9 per cent on softer raw material prices, but will still be below the pre-pandemic levels of ~10 per cent. During the past fiscal, prices of key inputs such as ethylene vinyl acetate, rubber and resins have fallen ~30 per cent and raw materials constitute ~45 per cent of the total cost of footwear makers. The resultant healthy cash accrual and balance sheets will keep their credit profiles stable, it added.
CRISIL Ratings analysed 43 footwear companies, which accounts for 15 per cent of industry revenue of Rs 100,000 crore.
Meanwhile, exports is seen slowing to ~12 per cent this fiscal in comparison to a growth of 25 per cent during the last fiscal. Exports constitute a fifth of the sector revenue and the slowdown was on high inflation that cut demand from Europe and the US which account for three-fourths of footwear exports from India. Last fiscal, exports grew on the back of pent-up demand after the pandemic.
However, domestic revenue is seen rising ~10 per cent, driven largely by higher selling prices. “This fiscal, the increase in average selling price will largely be due to a shift in the product mix towards higher-priced segments, compared with price hikes initiated in the past to counter costlier raw materials,” CRISIL Ratings said.
“Footwear makers have been sharpening focus on the fast growing fashion/women and athleisure segments after the pandemic, which largely falls in the premium category with average selling prices of Rs 1,000 per pair, or higher. These segments are expected to grow faster at over 15 per cent annually, compared with 11 per cent for the industry as a whole. Operating profitability is also higher at 18 per cent in this segment,” said Nitin Kansal, Director, CRISIL Ratings.
Footwear companies are expected to incur nominal capex as capacity utilization is at around 70 per cent. The working capital cycle is also expected to remain stable thus keeping the debt addition minimal. “Improved cash flows, healthy balance sheets and nominal capital expenditure will keep credit profiles stable. Companies rated by us will likely spend ~Rs 300 crore, adding a marginal 5 per cent to fixed assets. Hence, we expect gearing and interest coverage at 0.4 times and 7 times, respectively, this fiscal,” said Gaurav Arora, Associate Director, CRISIL Ratings.
Going forward, prices of crude-linked raw materials and macroeconomic developments will bear watching.