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Fall of 100-150 bps in operating profit likely this fiscal on global and local challenges

Indian apparel exporters are facing testing times with falling demand globally and operational challenges domestically due to the coronavirus outbreak.

Apparel exporters are expected to report a moderate profit this fiscal, with pressures likely to sustain at least in the near term and the turnover growth to be subdued, except for a few larger players with an established client base.

The industry is facing challenges such as increased bargaining power of buyers amid intense competition, cost-side pressures emanating from disruptions in procurement of materials and consumables (such as colours, chemicals, accessories/trims, etc) from China and write-backs of export incentives booked previously — all of which are expected to adversely impact profitability.

Fall in US imports

Jayanta Roy, Senior Vice-President and Group Head, Corporate Sector Ratings, ICRA, said in addition to sustained pressures on liquidity owing to delays in clearance of the Government dues, a fall of 100-150 bps in operating profit of Indian apparel exporters is expected this fiscal.

This may result in a moderation in debt coverage metrics and the impact will be more pronounced for leveraged and smaller companies, with limited bargaining power with customers, modest liquidity cushion and less financial flexibility to absorb the impact, he said.

This apart, demand in key markets has remained subdued with rapid spread of the Covid-19 across regions in the recent weeks. While demand from the EU has remained weak, recent trends in US apparel imports have also been discouraging, corroborated by a 12 per cent fall in apparel imports by the US in Q3 this year and an overall decline of 0.3 per cent in nine months of this fiscal.

Competition from peers

Competition from peer nations is intensifying with increasing penetration of free trade agreements. For instance, Bangladesh has duty-free access to the EU markets under the Everything but Arms scheme, while the EU-Vietnam Free Trade Agreement is in advanced stages of execution.

While the exporters factored in the export incentive benefits under the Rebate of State and Central Taxes and Levies (RoSCTL) scheme and the Merchandise Exports from India Scheme (MEIS) for the period March 2019 to December 2019, MEIS was discontinued with retrospective effect from March 2019 onwards. This has necessitated a write-back of export incentives already booked in the orders shipped during the current fiscal, affecting profitability.

Published On : 16-03-2020

Source : The Hindu Businessline

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