The second wave of the Covid-19 pandemic has unstitched demand recovery in India’s ready-made garments (RMG) sector, and we see it growing at 15-20% now this fiscal, or almost half the 28-33% expected earlier. Domestic demand, which accounts for almost three quarters of overall demand, has been severely affected by fresh curbs imposed in states to contain the pandemic.

Consequently, demand recovery to pre-pandemic levels is expected to be pushed back by at least a fiscal. But higher revenues this fiscal, supported by buoyant export demand, higher profitability and improving working capital management will benefit credit profiles, an analysis of over 140 CRISIL-rated RMG makers with aggregate revenue of ~Rs 20,000 crore, shows.

Significantly, this revenue growth would come on a low base – after an expected tumble of 23-25% last fiscal.

Domestic demand, which accounts for 74% of overall demand, had started recovering in the second half of last fiscal after lockdowns and other restrictions, which crimped first-half revenue. However since the fierce second wave landed in the first quarter of this fiscal, curbs have been re-imposed, slowing demand recovery.

Says Hetal Gandhi, Director CRISIL Research, “The first quarter of this fiscal will be a near-washout, with most domestic brick-and-mortar stores shut, and sales through e-commerce channels curbed. The second wave has also hit hinterland, affecting sales of ‘value’ or affordable garments, which is the fastest-growing segment. Thankfully, with vaccinations accelerating and case-loads decelerating, a gradual recovery is likely from the second quarter. Consequently, we see domestic sales growing 14-18% this fiscal compared with a 24% contraction last fiscal.”

On the other hand, export demand, which accounts for 26% of the revenue pie, has remained healthy (refer to chart 1 in annexure), and should log 18-22% growth compared with a 16% contraction last fiscal, because of improving discretionary spending in the US and Europe, which account for ~60% of India’s RMG exports.

Therefore, revenue growth for the industry is seen at 15-20% this fiscal, which will support operating leverage. CRISIL Ratings expects an improvement in operating profitability by 75-100 basis points (bps) on-year to 5.5-6% this fiscal. That will still be lower than the 8-9% seen between fiscals 2016 and 2019. During the first wave, RMG makers had cut promotion and travel expenditure significantly, which should support profitability in the current fiscal as well.

The working capital position of RMG makers is also expected to rebound close to pre-pandemic levels this fiscal, helped by prudent inventory management and normalisation of the debtor cycle. Gross current assets could revert to pre-pandemic levels of almost 180-190 days after increasing by 15-20 days last fiscal, when extension of credit period to customers stretched the working capital cycle.

Says Kiran Kavala, Associate Director, CRISIL Ratings, “The credit ratio (ratio of rating upgrades to downgrades), which was 0.16 last fiscal, should improve this fiscal as the credit outlook of RMG makers turns ‘stable’ from ‘negative’. Key debt protection metrics are also seen improving due to better business performance and working capital management. For instance, interest coverage ratio¹ is expected to improve to around 2 this fiscal from 1.5 times last fiscal.”

Any extension of lockdown beyond the first quarter will impact domestic RMG sales, while resurgence of infections in key export markets will bear watching.

¹ Adjusted earnings before interest, tax, depreciation and amortisation divided by total finance costs