Revenue of the Indian footwear sector is seen striding ~11% ahead this fiscal on higher realisations, while volume is seen up ~4%.

Operating margin is expected to expand by about 125 basis points to ~9% on softer raw material prices, but will still be below the pre-pandemic levels of ~10%.

Prices of key inputs such as ethylene vinyl acetate, rubber and resins have fallen ~30% in the past fiscal. Raw materials constitute ~45% of the total cost of footwear makers.

The resultant healthy cash accrual and balance sheets will keep their credit profiles stable.

A CRISIL Ratings analysis of 43 of them it rates, accounting for 15% of industry revenue of Rs 100,000 crore, indicates as much.

Exports, which constitute a fifth of sector revenue, is seen slowing to ~12% this fiscal - compared with a growth of 25% last fiscal - as high inflation cuts demand from Europe and the US, which account for three-fourths of footwear exports from India. Last fiscal, exports grew as pent-up demand after the pandemic continued.

Domestic revenue, on the other hand, is seen rising ~10%, driven largely by higher selling prices. This fiscal, the increase in average selling price will largely be due to a shift in the product mix towards higher-priced segments, compared with price hikes initiated in past to counter costlier raw materials.

Says, Nitin Kansal, Director, CRISIL Ratings, “Footwear makers have been sharpening focus on the fast-growing fashion/women and athleisure segments after the pandemic, which largely falls in the premium category with average selling prices of Rs 1,000 per pair, or higher. These segments are expected to grow faster at over 15% annually, compared with 11% for the industry as a whole. Operating profitability is also higher at 18% in this segment.”

Footwear companies are expected to incur nominal capex as capacity utilization is at around 70%. The working capital cycle is also expected to remain stable thus keeping the debt addition minimal.

Says Gaurav Arora, Associate Director, CRISIL Ratings, “Improved cash flows, healthy balance sheets and nominal capital expenditure will keep credit profiles stable. Companies rated by us will likely spend ~Rs 300 crore, adding a marginal 5% to fixed assets. Hence, we expect gearing and interest coverage at 0.4 time and 7 times, respectively, this fiscal.”

In the road ahead, prices of crude-linked raw materials and macroeconomic developments will bear watching.