With mobility and discretionary spending improving, the footwear sector could see revenue growth striding ahead by 23-25% next fiscal, closing in on pre-pandemic topline levels of ~Rs 70,000 crore.

Credit profiles will remain stable owing to healthy capital structure despite cost pressure from higher raw material prices, a study of 86 CRISIL-rated footwear makers shows.

The revenue growth next fiscal will come on a low base because of a likely contraction of 21% this fiscal. The pandemic led-lockdown, and the shift to work from home impacted footwear demand severely in the first half.

Domestic demand, which accounts for ~75% of the sector’s revenue, rebounded from the third quarter of this fiscal owing to relaxation in lockdown and festive spending. Revenues clawed back to over 90% of their pre-pandemic levels in the third quarter, and is expected to recover almost fully in the current quarter. Net-net, domestic demand will decline ~19% this fiscal.

Exports remain weak because major markets such as the United States and Europe have witnessed fresh lockdowns. India’s footwear exports contracted a sharp ~30% in the first nine months and would end up the fiscal with 25% de-growth.

Says Nitin Kansal, Director, CRISIL Ratings, “Calibrated re-opening of offices and schools, and resumption of social gatherings will support footwear demand next fiscal. Also, Covid-19 vaccination across the countries will spur mobility of people and result in demand growth. However, the operating profitability of footwear companies is expected to contract by 150-175 basis points due to higher raw material cost.”

The raw materials used in footwear account for 40-50% of total cost of manufacturing. A significant portion of these are crude-linked. Crude oil prices have doubled this fiscal to ~$50 per barrel in December 2020 from ~$23 per barrel in April 2020. Crude prices are expected to average $55-60 per barrel next fiscal, driven by economic recovery leading to healthy demand. However, footwear companies will have limited flexibility to pass on higher input prices because their recovery would be nascent. As a result, their operating profitability will contract next fiscal (refer to chart 1).

Moderation in operating margin will lead to a decline in the interest coverage ratio for the sample set to 3.8 times next fiscal from 4.1-4.3 times over the past two fiscals (refer chart 2).

Says Nilesh Aggarwal, Associate Director, CRISIL Ratings, “However, the capital structure will sustain at healthy 0.5-0.6 time because of controlled debt utilisation. Also, footwear companies have sufficient capacities available and thus investment in fixed asset addition is expected to be moderate in the next fiscal. This will support the credit profile of footwear companies. ”

Healthy order flow from major export markets, improved domestic demand and the Covid-19 affliction curve would be the key monitorables.