Sep 29, 2022
According to ICRA India’s footwear industry’s OPM to rise by 200-300 bps in FY2023
Sep 29, 2022
The operating margin of India’s footwear industry is anticipated to increase by 200-300 bps in fiscal 2023, according to the Investment Information and Credit Rating Agency. In a recent note on the domestic footwear industry, the entities in ICRA’s sample set are projected to achieve a year-on-year revenue growth of 14-15% in FY2023.
The projection equates to a sales growth of around 10% over the pre-COVID levels, according to a press release by ICRA.
“Driven by increased footfalls and uptick in discretionary spends, the demand for footwear is expected to remain healthy, especially in the offline retail route during the upcoming festival and wedding seasons. While the recovery had been derailed slightly in Q4 FY2022 owing to the third wave, the sector bounced back since March 2022. In addition to the formal footwear segments, the growing athleisure segment further supports revenue growth. Moreover, increasing omnichannel presence has also added to the sales volumes,” said Gaurav Singla, assistant vice president, ICRA, while elaborating on the industry performance.
While cost rationalisation was the focus area in FY2021 and companies saved on employee and other expenses, including rental concessions and advertisement expenses, a large portion of such costs was back to pre-COVID levels in FY2022. Although these costs are expected to increase further in the current fiscal, the profitability of these players would witness an improvement because of healthy volume growth.
In addition, the raw material prices have started moderating in recent months, which, if sustained, would also support the profitability of footwear players in FY2023. The export of footwear has also improved in FY2022 and H1 FY2023, with the US, the UK, and Germany emerging as the major export destinations. However, with approximately 1% share of the global trade, India remains a marginal player.
The impact of the increase in goods and services tax rate from 5% to 12%, in the category of an MRP of under RS 1,000 largely varied based on the portfolio mix and the stock levels maintained by the companies. As per the quarterly performance of the major players, the higher rates were passed on to the end customers and the impact on the margins remained minimal. However, a few players had witnessed somewhat weaker demand due to a high price elasticity at the lower end of the spectrum, added the release.
“The financial position of the large, listed entities is expected to remain strong with healthy on-balance sheet liquidity and low financial leverage. The companies are aggressively expanding in tier 3 towns and rural areas through the franchisee route, thus limiting their own capex requirements,” said Priyesh Ruparelia, vice president and co-group head, corporate ratings, while commenting on the credit profile of the entities.
“With healthy profits and low leverage, the credit metrics of the industry are expected to remain strong with interest coverage and Total Debt/OPBDITA of 8.1 times and 1.4 times respectively in FY2023 compared to 6.8 times and 1.7 times respectively in FY2022, which are likely to improve further in FY2024. Going forward, the sustainability of demand momentum along with the trend in raw material prices will be the key monitorables,” Ruparelia reiterated.
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