Demand and margin recovery of footwear entities pushed back to Q2 FY2023

Demand and margin recovery of footwear entities pushed back to Q2 FY2023’

• ICRA expects the revenues of domestic footwear entities to remain 10-15% below pre-Covid levels in FY2022
• While the recovery had been sharp in Q2 and Q3 of the current fiscal, the localised restrictions amid the third wave could potentially shave off 10% of the revenues in Q4 FY2022
• The ratings agency expects the revenue growth of footwear players to remain in the range of 8-10% in FY2023
• The financial position of large, listed entities is expected to remain strong with healthy on-balance sheet liquidity and low financial leverage
• The further spread and severity of the pandemic and pace of recovery in demand will be the key monitorables

• Revenues and margins of footwear entities expected to decline in Q4 FY2022; however, strong bounce back expected post the third wave
• Healthy balance sheets to support the credit profiles of large, listed footwear entities

National, 24th February 2022 (GNI): ICRA expects the revenues of domestic footwear entities to remain ~10-15% below pre-Covid levels in FY2022 with the reversion expected only by Q2 FY2023. This is assuming the absence of any fresh wave of infections. While the recovery had been sharp in Q2 and Q3 of the current fiscal, the localised restrictions amid the third wave could potentially shave off ~10% of the revenues in Q4 FY2022 compared to the previous fiscal. Consequently, while the Y-o-Y revenue growth is expected at ~20-25% in FY2022 on a low base, the entities will continue to witness muted performance compared to pre-pandemic levels. The decline in revenues in Q4 FY2022 is expected to be more pronounced for entities having prominent retail presence, particularly in Metros and Tier-1 cities. However, entities with omni-channel presence will be better placed with limited impact on revenues. Moreover, with continued easing of restrictions in recent weeks, a strong rebound of sales is expected in the coming months, akin to that witnessed post the second wave. The ratings agency expects the revenue growth of footwear players to remain in the range of 8-10% in FY2023, thereby mirroring pre-pandemic levels.

Elaborating on the industry profitability, Mr Gaurav Singla, Assistant Vice President, ICRA said, “With expected margin pressure in Q4 FY2022, the overall operating margin in FY2022 would remain slightly higher compared to FY2021 but still lower by ~400-500 bps against FY2020 levels. While cost rationalisation efforts, including rental concessions, would support margins to an extent, it is to be noted that the extent of concessions was markedly lower in the current fiscal, indicating limited headroom for further reduction in the fixed cost. The higher raw material prices also impacted margins to an extent. We expect the operating margin to return to pre-Covid levels by Q2 FY2023 with improved scale”.

The prices of major raw materials viz. polyvinyl chloride (PVC) and ethylene vinyl acetate (EVA) had substantially increased in CY2021, the impact of which was offset through price hikes to an extent. However, the raw material prices in FY2022, notwithstanding slight moderation in recent months, continue to remain high, which, if sustained, would negatively impact profitability of footwear players in FY2023. 

In terms of the credit profile of the footwear industry, while the third wave will moderate margins in Q4 FY2022, the financial position of 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. The credit metrics is expected to remain strong with interest coverage and Total Debt/OPBDITA of 6.5x and 1.7x respectively in FY2022 compared to 4.2x and 2.4x respectively in FY2021 and is likely to improve further in FY2023. “Going forward, the further spread and severity of the pandemic and pace of recovery in demand will be the key monitorables,” Mr. Singla reiterated. End