A CRISIL Ratings analysis of 30 hosiery makers, accounting for a third of the industry by revenue, has indicated that the revenue of Indian hosiery makers is expected to increase 10-12% on-year this fiscal following a revival in rural demand, volume support from the export market and robust modern trade sales.
The volume growth will more than offset a 1-2% on-year decline in average sales realisation because of a drop in selling prices to clear year-end inventory after demand from channel partners slackened.
The industry’s operating margin is expected to improve 150-200 basis points (bps) this fiscal, owing to softer input prices and improved capacity utilisation, aided by higher volume growth.
Says Argha Chanda, Director, CRISIL Ratings “The revenue growth of 10-12% will ride on higher contribution of rural sales, which account for almost half the domestic revenue. Increase in agricultural yield following an above-normal monsoon, hike in the minimum support price and higher government spending on rural infrastructure will support rural spending. Increase in exports to the Middle East and North Africa along with expected growth in urban demand led by growing modern trade will also improve volume growth.”
The hosiery industry typically sees a spike in volume by year-end as channel partners start stocking to meet high demand during the summer season. However, year-end sales last fiscal were impacted by lower stocking in anticipation of a fall in average product realisation amid consistently falling yarn prices. That said, stability in yarn prices this fiscal and 1-2% dip in selling prices have led to a resurgence in demand from channel partners.
Amid strong demand from channel partners, hosiery manufacturers will curtail their spending on advertising and marketing. Also, operating leverage will increase amid higher capacity utilisation. The upshot is that the operating margin of hosiery manufacturers rated by CRISIL Ratings should widen 150-200 bps to 11.5-12% this fiscal, driving up cash accruals.
Higher cash accruals and reduced inventory holding periods are expected to lower the working capital requirement and strengthen the liquidity profile of players. Also, capacity utilisation continues to be moderate and no major expansion is expected. This should limit long-term borrowings and finance costs.
Says Vishnu Sinha, Team Leader, CRISIL Ratings, “Inventory holding is expected to fall to a historical low of 90-100 days this fiscal from 150 days in fiscal 2024. Accordingly, moderation in working capital requirement and no major debt-funded capital expenditure should keep debt levels in check. The ratio of total outside liabilities to tangible networth is forecast to remain below 1 time, consistent with last fiscal. The improved operating performance of hosiery makers will improve interest coverage to ~6.5 times this fiscal from 4.5 times last fiscal.”
However, the impact of inflation and sustenance of farm incomes are key aspects of the rural economy that will bear watching. Export growth and dynamics within the modern trade segment will also need to be monitored as they play a crucial part in achieving higher-than-expected volume and margin growth.
