CRISIL Ratings: Modest domestic demand to limit RMG growth to 4-6% this fiscal

India’s readymade garments (RMG) industry is expected to see revenue growth moderate slightly to 4-6% this fiscal, compared with 6% last fiscal. This would be due to sluggish domestic demand stemming from a shift in consumer spending towards alternative avenues and some inventory build-up last fiscal as retailers¹ had stocked up in anticipation of a continuation of the high domestic revenue growth (around 18%) seen in fiscal 2023.

Last fiscal, overall revenue growth was driven by a 10% increase in domestic revenue even as export revenue declined 7%. That is expected to reverse this fiscal, with exports rebounding and domestic apparel demand growth moderating (Chart 1 in annexure).

Says Gautam Shahi, Director, CRISIL Ratings, “The domestic market, which contributes three-fourths of the RMG industry’s revenue, is expected to grow a modest 4-6% this fiscal² due to a shift in consumer spending towards avenues such as travel, electronic gadgets and other services. Moreover, the contagion effect of retailers’ overstocking last fiscal impacted RMG manufacturers’ revenue growth in the first half of this fiscal. The second half, however, is expected to receive a fillip from the festive season and a higher number of weddings.”

On the other hand, exports’ revenue, which accounts for a fourth of the RMG industry’s revenue, is expected to rise 5-7% this fiscal as retailers in the United States and the European Union replenish inventories. Meanwhile, realisations may remain flat amid expectations of lower cotton prices.

Given relatively low and stable raw material prices, the operating margins of RMG players are likely to remain steady at 11.0-11.5% this fiscal, similar to last fiscal.

The RMG industry remains labour-intensive, with low reliance on capital expenditure (capex). Stable working capital cycles of RMG entities will minimise the need for incremental working capital debt this fiscal and, together with strengthened balance sheets, ensure credit profiles are stable.

An analysis of more than 140 RMG makers rated by CRISIL Ratings, with aggregate revenue of ~Rs 43,000 crore, indicates as much.

Says Pranav Shandil, Associate Director, CRISIL Ratings, “Moderate revenue growth and stable margins will help sustain operating performance of RMG manufacturers. This, along with modest capex and a steady working capital cycle, will support their credit profiles this fiscal. The interest coverage ratio is expected to improve to 5.6 times this fiscal from 5.2 times last fiscal, while the total outside liabilities-to-tangible net worth ratio will remain healthy at 0.7 time as on March 31, 2025 (0.8 time last fiscal).”

All said, the recent political turmoil in Bangladesh will remain a monitorable for the industry. While it could have a transitory positive impact on Indian RMG exporters, the upside is likely to be limited due to the criticality of RMG exports³ to Bangladesh’s economy, differences between the product portfolios of RMG exporters in Bangladesh and India, and favourable import duty applicable for Bangladesh’s RMG exports to the European Union⁴.

¹ Average inventory holding for three major retailers increased to 159 days as on March 31, 2024, from 143 days as on March 31, 2023.

² Retailers Association of India (RAI) business survey data shows a moderation in on-year sales growth for apparel retailers to 2-4% for the 5 months from April to August 2024, as against 4-8% for the 5 months from April to August 2023.

³ Knitted and Woven garment exports formed ~82% and ~81% of Bangladesh’s total exports for the 12 months from July 2022 to June 2023 and from July 2023 to June 2024, respectively

⁴ Bangladesh enjoys 0% import duty on RMG exports to EU as against ~9.6% for India.