The footwear sector’s performance in FY2021 is likely to be significantly affected due to the Covid-19 pandemic, according to ICRA. 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.
While volumes would be considerably impacted, as per the note, 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 vis-a-vis the value segment,” says Kapil Banga, Assistant Vice President, ICRA.
The COVID-19 pandemic is also likely to compel players to shift to e-commerce. For majority of the players’ online sales has remained low as a proportion of total sales, with proceeds from the online channel generating lower than 10% 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.
India primarily exports leather footwear and leather products to the UK, Germany, the US and Italy. The country’s exports to these four nations contributed 45% to the leather and leather goods exports in FY2019. Now that these nations have been grappling with the effect of the COVID-19, the demand from destination countries is also expected to remain subdued, as is evident from the 8.5% decline in exports of leather and leather products in FY2020 vis-à-vis FY2019.
The decline in exports, of leather and leather products, was very sharp- 37%- in March 2020. Leather footwear accounts for the largest portion of exports of leather products from India, at 39% in FY2019, followed by leather goods at 25% and finished leather at 13%.
It’s believed that the pandemic is expected to have a substantially higher impact on players with weaker balance sheets and on players with limited financial flexibility, compared to the stable and larger footwear players with higher liquidity buffer and stronger balance sheets.
“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. This would also lead to the rise in total debt for the entities in the sector, although stretching of the payments to suppliers would partly offset the impact of higher working capital blockage,” Banga adds.