The Indian hosiery¹ industry will stitch up a revenue of ~Rs 36,000 crore this fiscal, 18-20% higher on-year, riding on a revival in rural demand.

Operating margin will expand 300-400 basis points (bps) on softer input prices and improved capacity utilisations.

A CRISIL Ratings analysis of 28 hosiery makers, accounting for a third of the industry by revenue, indicates as much.

Rural demand, which accounts for almost half the domestic revenue, was impacted last fiscal amid rising inflation and lower farmer income. As a result, the overall volume plunged 30% on-year.

Says Rahul Guha, Director, CRISIL Ratings, “This fiscal, urban demand is expected to remain stable, while a well distributed monsoon and probable inflation moderation should boost rural demand, leading to a recovery of 35-40% in volume. Potential export opportunities, especially to Gulf countries, could bump up volume further.”

Notably, the Comprehensive Economic Partnership Agreement² signed by the government with UAE could boost textile segment exports, especially of hosiery. Tailwinds from the agreement could add 2-3% to hosiery exports from the historical level of ~10%.

That said, revenue growth would be higher than the 18-20% expected, were it not for a 15-17% fall in realisations that saw a significant uptrend in the past two fiscals.

On the input side, the price of cotton yarn, the key raw material, nearly doubled in the last two fiscals. Hosiery makers had to absorb a sizeable portion of the price rise amid muted demand as well as spend more on marketing and advertising to push sales. As a result, operating margin shrank 250 bps last fiscal.

While yarn prices have crashed since the second half of fiscal 2023, the entire benefit has not been passed on to the consumers. This can be seen in the widening spread between realisation and cost. Further, amid strong demand pull, hosiery manufacturers will curtail their spends on advertising and marketing expenses. Increased operating leverage from higher capacity utilisations, too, will aid profitability. Hence, operating margin will improve to the pre-pandemic level of 12-14%.

Says Himank Sharma, Director, CRISIL Ratings, “Capacity utilisation, which had fallen to ~60% last fiscal, will rebound to ~90% this fiscal. We don’t see companies taking up significant capacity expansion this fiscal, so addition of long-term debt will be minimal. Strong cash flows from higher revenue and profitability will be sufficient to meet incremental working capital requirement and keep overall debt in check.”

Total outside liabilities to tangible networth and interest coverage ratios will improve to 1.0 and 6.5 times, respectively, better than the pre-pandemic levels. This will alleviate pressure on the credit risk profiles seen last fiscal amid declining revenue and profitability.

However, erratic rainfall or inflation could dampen rural sentiment and remain key downside risks while higher exports may support the growth and margins further.

¹ Hosiery includes stocking, socks, undergarments and knitted t-shirts
² India-UAE CEPA came into effect on May 1, 2022. India will benefit from preferential market access provided by the UAE on over 97% of its tariff lines, which account for 99% of Indian exports to the UAE in value terms, particularly from labour-intensive sectors such as gems and jewellery, textiles, leather, footwear, sports goods, plastics, furniture, agricultural and wood products, engineering products, pharmaceuticals, medical devices, and automobiles (Source: https://pib.gov.in/PressReleasePage.aspx?PRID=1821785).