Is there a good news for Indian ready-made garment industry?

On the back of healthy domestic demand and revival in exports, the revenue of Indian ready-made garment (RMG) manufacturers is expected to increase by 8-10% in the current fiscal, according to a report by CRISIL which surveyed 146 ‘CRISIL-rated’ RMG manufacturers.

The report states that higher domestic and export volumes along with lower cotton prices are expected to lift up the operating margins this fiscal. However, any shift in domestic consumer discretionary spending or a decline in exports will need to be closely monitored.

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India has established itself as a leading country in garment manufacturing worldwide, with a rich history of fine craftsmanship across the entire value chain, from fibre, yarn, and fabric to apparel. Indian textiles and apparel products have a high global appeal, and India’s cotton, silk, and denim are highly sought after in other countries. Indian apparel has also found success in fashion centres around the world.

When it comes to ready-made garments (RMG), as of February 2022, the cumulative RMG exports from India amounted to USD 14.75 billion, indicating a growth of 3.3% over the same period last year. Additionally, a remarkable growth of 35.8% was observed over the same period in 2020. The accomplishment showcases the quality and appeal of Indian ready-to-wear garments and the demand growing globally.

What is the growth prediction? 

Indian manufacturers of ready-made garments are likely to see an increase in their revenue in the current fiscal. According to a report by CRISIL Ratings, the revenue of RMG manufacturers is set to grow by 8-10% in FY24, owing to the rising domestic demand and recovery in exports.

The surge in domestic demand and exports, as per the report, is ascribed to a drop in cotton prices and improvements in supply-chain disruptions.

The CRISIL report predicted a higher volume growth of 6-8% in the current fiscal year, compared to 3-5% in the preceding year. The revenue growth, however, is expected to be lower than the 14% seen in the previous fiscal year, due to moderation in realizations caused by declining raw material prices.

According to the report, the prices of cotton and manmade fibre are seen to be declining year-on-year this fiscal by 15–17% and 8–10%, respectively. The increase in realizations as a result will be merely 1-3% this fiscal, as against 10% last year.

Gautam Shahi, Director at CRISIL Ratings stated that readymade garment manufacturers would largely depend on domestic consumption, which accounted for 75% of the overall demand. The domestic demand is expected to grow by 6-8% in volume terms in the current fiscal year. Meanwhile, the volume of exports, constituting about 25% of the RMG demand is likely to grow by 4-6% year-on-year due to restocking by global retailers, lower price of cotton (the key raw material for RMG), and gradual consumption recovery in overseas markets. He further noted that lower inflation levels and stable economic growth are crucial to healthy discretionary expenditure by domestic consumers.

It must be noted that the volume of exports in the previous fiscal year had decreased by 7% year-on-year due to a rise in domestic cotton prices and a decline in demand from major markets like the US and the European Union, which account for 60% of shipments.

CRISIL report has predicted that in the current fiscal year, higher domestic and export volumes along with lower cotton prices will help boost operating margins by 50 basis points (bps) to 9.5% year-on-year. The operating margin in the last fiscal had contracted by 150 bps due to higher cotton prices, delayed price hikes in the domestic market, and lower offtake by global retailers amid rising inventory.

The report added that the credit outlook for readymade garment manufacturers, remains stable, driven by steady operating performance and healthier balance sheets amid low capital expenditure and stable working capital requirements. 

Over the past three fiscal years, gearing (i.e. Total debt by networth) has improved on account of healthy cash accrual and low capex. As per the report, Gearing is expected to improve further to about 0.45 time in the current fiscal, from 0.56 time as of 31st March 2023. 

Interest Coverage, as per the report, will be over 4 times this fiscal, as compared to 3.5 times in the previous fiscal year.

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.”

The report, which analyzed 146 ‘CRISIL-rated’ RMG manufacturers (having an overall revenue of Rs 42,000 crore), stated that it will be worth keeping an eye on any shift in domestic consumer discretionary spending resulting from below normal monsoon or a decline in exports caused by any global challenge.