ICRA expects the revenue growth of the footwear entities in a sample survey, accounting for ~48% of the organised footwear industry’s total revenue in FY2023, to moderate to ~7-8% in FY2024. This would be driven by a sluggish volume growth with no significant increase in average selling price (ASP) expected in the coming quarters. The mass segment continues to face headwinds and its demand is unlikely to improve significantly in the near term, in ICRA’s view.
Elaborating on the industry performance, Priyesh Ruparelia, Vice President and Co-Group Head, Corporate Ratings, said: “Elevated inflation remains a drag on the mass segment products, thus prolonging the deceleration that started from Q4 FY2023. The footwear entities were unable to undertake any major price hikes in the last 2-3 quarters. After a stagnant performance in Q1 FY2024, the total revenue is unlikely to improve significantly in Q2 FY2024. While some recovery is expected in H2 FY2024 with the onset of the festive and wedding seasons, the overall revenue growth is likely to moderate sharply to ~7-8% in FY2024 from the high 28% in FY2023. However, companies with major focus on the premium segment will continue to perform well.”
On the input side, while the softening in raw material (RM) prices is estimated to support the operating margin (OPM) in H1 FY2024, increasing RM prices since August 2023 are likely to impact the margins in H2 FY2024. Consequently, the OPM is expected to remain flat at ~18.5% in FY2024.
ICRA also notes the recent issuance of the Government of India’s (GoI) quality control order (QCO) pertaining to around 24 footwear and related products, which became applicable w.e.f. July 1, 2023 for the large and medium scale entities. However, for some products, where the standards have been recently amended, the applicability was revised to December 31, 2023.
Since a significant portion of the revenues of the organised footwear entities are concentrated around those products, the major impact of the QCO implementation would be visible from January 2024. ICRA believes the standards are expected to result in a supply disruption in the near term as the players adjust to the new regulatory regime.
There was a significant increase of ~35% in import of footwear products during April-Jun 2023 in anticipation of the supply disruption, resulting in front-loading of inventory on entities’ books. While the imports moderated in July 2023 following the deferred implementation of QCO guidelines for major products, the working capital requirements are likely to remain high in the near-term. In the long run, however, the regulation is expected to increase the formalisation of the footwear industry.
Commenting on the credit profile of the entities, Ruparelia, said: “While the revenue growth is expected to remain muted, the financial position of footwear players in the ICRA sample will remain strong with healthy on-balance sheet liquidity and low financial leverage. Companies are aggressively expanding in Tier 3 towns and rural areas through the franchisee route as well as improving their online penetration, thus limiting their own capex requirements. The credit metrics of the industry are likely to remain strong with interest coverage and Total Debt/OPBDITA of 9.1x and 1.4x, respectively, in FY2024 compared to 8.5x and 1.5x, respectively, in FY2023. Going forward, the recovery in the demand, primarily in the mass segment along with normalisation in raw material prices, will be the key monitorables.”
