Rating agency Icra has assigned negative outlook to the Indian footwear sector due to weak consumer sentiment and continuing slowdown in Europe.
"In FY2016 and first quarter of FY2017, footwear export companies witnessed pressure on their volumes leading to a decline in turnover and weakening of profit margins. The weak macroeconomic environment in the Eurozone has led to sluggish demand, which has impacted their sales and also contracted their order books," Icra said in a statement.
The Indian footwear exports reported a de-growth of 0.5 per cent during FY2016 in value terms due to weak demand from the European continent which forms the largest market for the Indian footwear companies.
"The Indian companies have been trying to increase exports to other continents, especially the USA, but there has been limited success till date. China continues to be the dominant player in global footwear exports with a volumetric share of 69 per cent, however its share has reduced by almost 400 basis points over the last two years.
"While India has not been able to gain from this opportunity, Vietnam has benefited the most as is reflected in an annualised growth of 22 per cent in its footwear exports between 2013 and 2015," it noted.
It observed that the Indian domestic footwear companies have also witnessed pressure on sales volumes in the recent quarters due to weak consumer sentiment.
"This has constrained their ability to increase the retail prices of products, thereby leading to modest turnover growth in the recent quarters," it said.
Currently, the Indian footwear sector is highly fragmented with almost 15,000 small and medium enterprises operating largely in the unorganised segment and limited presence of organised segment.
"Weak macroeconomic environment in the European markets has put pressure on revenues and profitability of the Indian footwear exporters as they continue to have almost 70 per cent exposure to such markets. Our interactions with the management of leading footwear export companies suggest that there has been contraction in export orders by around 25 per cent in the recent quarters," Icra Vice-President Shubham Jain said.
"This is likely to impact the financials of footwear export companies in the short to medium term. However, most of the footwear companies have stalled or deferred their capital expenditure plans which is expected to keep their debt levels controlled," he added.
The rating agency believes that for the Indian footwear sector to witness healthy growth going forward, a strong government push is required with focus on promotion of exports, employment generation, fiscal incentives for foreign direct investment and capacity addition and relaxed labour norms.
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