Closure of retail outlets coupled with weak consumer sentiment due to the ongoing lockdown is likely to impact the footwear industry which is expected to witness a 10-15 per cent decline in revenues in the current fiscal, says ICRA.
Prime minister Narendra Modi announced a nationwide lockdown from March 25 to control the spread of the deadly coronavirus.
With the lockdown being extended till May 17, though with certain relaxations in few non-hotspot zones, the sector's performance is likely to be impacted due to nil revenues during this period.
"Given the closure of retail outlets and restriction of delivery of non-essential items in certain areas, the revenues for FY2021 are expected to drop by 10-15 per cent as compared to FY2020, with a larger impact on profitability," the agency said in its report.
Icra also noted that while volumes would be considerably impacted, a marginal decline in the average selling price (ASP) is also likely due to the expected discounts owing to the companies' inclination to convert the limited footfalls, post Covid-19 into sales to shore up their cash flows while liquidating the inventory.
"Further, factors like the impact on disposable incomes, consumer sentiment, closure of educational institutes, offices, public spaces and drop in movements, will keep the demand for footwear subdued in FY2021.
"This apart, due to downtrading by consumers, the impact is expected to be higher on the premium segment as against the value segment," its Assistant Vice President Kapil Banga said.
With the world moving the digital way and e-commerce catching up in the wake of COVID-19, Icra noted the share of sales through online channel is likely to increase significantly in the near term.
"For the majority of the players, online sales have remained low as a proportion of total sales, with proceeds from the online channel generating lower than 10 per cent of sales. However, with the norms of social distancing expected to remain in place, along with the fear of stepping out in public places, the share of sales from e-commerce is likely to increase significantly in the near term," he added.
According to the agency, exports of leather footwear and leather products to the UK, Germany, the US and Italy, which contributed to nearly 45 per cent of total exports in FY2019, is expected to remain subdued, as is evident from the 8.5 per cent decline in exports of leather and leather products in FY2020.
"The decline in exports, of leather and leather products, was very sharp 37 per cent in March 2020. Leather footwear accounts for the largest portion of exports of leather products from India, at 39 per cent in FY2019, followed by leather goods at 25 per cent and finished leather at 13 per cent," the report said.
Owing to this, the capex outgo for the year FY2021, both in terms of addition to the manufacturing capacity of plants as well as addition to the retail store network, is likely to be moderated by the footwear companies to preserve cash.
"Besides, the operating profit margins are expected to decrease by over 400 basis points, and the net profit margin is likely to face an even sharper dip, given the estimated rise in borrowings, largely to fund the increased working capital requirements.
"With the decrease in sales, a longer collection period, higher inventory-holding period and outflows towards certain fixed expenses amid a fall in revenues, the cash flows are likely to be impacted," Banga added.
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