The impact is steeper for smaller players since large scale companies benefit from cost savings on bulk purchases of raw materials. For H1 FY2023, inventory levels for most players have come down with the cotton stocks from the previous harvest season getting extinguished and sharp volatility in cotton prices affecting the buying power of spinners.
Unlike the Indian cotton spinners, apparel exporters demonstrated resilience against the macro headwinds. The revenue for ICRA’s sample set of apparel exporters improved by ~4.5% on a YoY basis. The healthy growth in revenues continued in Q1 FY2023 followed by all-time high revenues registered in FY2022. With recessionary environment in the key export markets affecting discretionary consumer spending leading to lower export sales, most of the sample companies reported a sequential decline in Q2 FY2023.
And with higher raw material prices exerting cost pressures, operating margins remained flat with ~180 bps moderation in Q2 FY2023 in comparison to Q2 FY2022 levels for the samples across different scales. With moderation in the profitability for companies across different scales, the interest cover for the sample companies also declined in Q2 FY2023. The decline is also partially attributable to increased interest cost with debt-funded capex undertaken in H1 FY2023 by most players. For H1 FY2023, inventory levels for most players had reduced. This was in line with the large retailers who focused on reducing inventory due to a weak demand scenario and recessionary pressures in key exporting regions.
Elaborating on this, Sahil Udani, Assistant Vice-President & Sector Head, Corporate Sector Ratings, ICRA, said in a statement: “We expect textile companies to report healthy growth in turnover in FY2023 while the margins are expected to moderate amidst cost pressures. In Q2 FY2023, revenue and margins dipped for the Indian spinners amidst macro headwinds, while for the apparel segment the revenue and margins remained flat, with recessionary conditions in key markets. Most players (across different scales) reported a decline in inventory levels in Q2 FY2023 after cotton stocks from the previous harvest season started to reduce and cotton prices saw a sharp volatility, resulting in players becoming cautious on buying.”
ICRA expects its sample set of spinners to report some moderation in performance in FY2023 from FY2022 levels, while the OPM is expected to be ~10-11% in FY2023. However, the absolute profits are projected to remain healthy, supported by a higher scale of operations, though lower than the FY2022 level. While for its sample of apparel exporters, the rating agency expects a healthy growth in revenues in FY2023, though with moderate margins of ~100-300bps in FY2023 from the levels reported in FY2022. The sector outlook continues to remain stable.