Indian Tax Solution

GST, weak demand, falling exports continue to hound branded apparel makers

Branded apparel manufacturers and retailers are yet to overcome the implications of the goods and services tax (GST) rollout in July. The tax reform had directly impacted the entire textile chain due to cascading burden. And post GST, poor consumer sentiment and falling exports have only made matters worse for the business. The September quarter results of large players stand testimony to this and experts don't see better days on the horizon for them.

Branded apparels priced at Rs 1,000 or above attract 12 per cent GST, while those below this threshold suffer 5 per cent. With this levy, retailers have seen consumers shift towards low-priced apparels. Established players who've had to comply with new tax mechanism don't deal in cash to avoid the levy.

Besides, branded apparel firms had to buy back their inventory from bulk consumers ahead of the effective date of GST implementation, July 1, to avoid high tax levy on the apparels they had bought by paying less tax earlier. This has already resulted in some additional stock lying with them.

Rahul Mehta, President, The Clothing Manufacturers Association of India, says, "Weak consumer sentiment, plunging exports and liquidity shortage in many companies is likely to sustain stress levels in branded apparel companies for a few months more." He feels FY18 is a lost year for them. Exports were down 41 per cent in October, continuing the trend seen post GST due to withdrawal of duty drawback benefits. Slight depreciation of the rupee has not helped. Diwali and the overall festive season, according to Mehta, also haven't helped much. All said and done, they are virtually sitting on idle stock.

All this has impacted the July–September financial numbers of branded apparel firms, with both turnover and net profit remaining under pressure.

"Branded apparel and retail companies are expected to report lower-than-normal revenue growth in a seasonally strong quarter, even as their margins are likely to be impacted by a one-time cost on inventory due to GST. We recommend investing in the space with a 3-4-year horizon as companies attain scale by expanding distribution network and improve margins, cash flows and return ratios," said Krupal Maniar, an analyst with ICICI Securities.

For example, Aditya Birla Fashion & Retail (ABFRL) delivered another weak quarter impacted by the GST rollout, transition issues and weak consumer sentiment, especially in July. Although GST is expected to be a medium-term positive, end-of-season sale in June and consequent drop in footfalls in July, coupled with a one-time GST related compensation of Rs 26 crore to the channel led to a loss in 2QFY18.

But factors started to recover in September, given strong festive season sales. Revenue was much lower than expectation at Rs 1,800 crore, down 4 per cent y-o-y, led by a 7 per cent y-o-y decline in lifestyle brands, a muted 2 per cent y-o-y growth in Pantaloons and weak growth in fast fashion. This revenue shortfall led to an Ebitda margin decline of 220 bps y-o-y to 6.6 per cent, excluding the GST write-off.

"Pantaloons witnessed a small decline in margins. Lower growth expectations, given multiple headwinds, and ongoing capex plans that are delaying free cash generation are key reasons for a downward rating revision to 'hold' now from 'buy'," said Himanshu Nayyar, Analyst, Systematix Shares & Stocks (I) Ltd.

Meanwhile, Raymond Ltd posted 13 per cent growth in branded apparels sales, though weak exports and suiting sales saw branded textile revenues lower by 2 per cent y-o-y. Raymond's high-value cotton shirting (HVCS) grew by 1 per cent in the September quarter to Rs 150 crore, impacted by weak consumer offtake due to GST. Lower raw material costs and improved product mix aided in 120 bps Ebitda margin expansion to 11.3 per cent,.

"Whenever there is early Diwali, you tend to lose out in the north. If you compare Diwali to Diwali, numbers are subdued. But organised players should do well now. Unorganised players who avoid taxes, will face challenges. There was a temporary slowdown but things became normal quickly. In fact, we did like-to-like growth of 16 per cent in the second quarter of this financial year," said Sanjay Lalbhai, chairman and managing director at textile and apparel company Arvind Ltd.

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