GST WOES FOR BRANDED APPAREL FIRMS PERSIST

Weak consumer sentiment, fall in exports also spoil the party

Branded apparel manufacturers and retailers are yet to overcome the impact of the new indirect tax regime.

The textile chain was in limbo after the goods and services tax (GST) was introduced because of the cascading tax burden and now consumer sentiment has been impacted. Falling exports have made matters worse. The September-quarter results of big players have reflected this.

Branded apparel products that cost more than ~1,000 attract 12 per cent and those below this 5 per cent. As a result, consumers are shifting towards low-priced apparel. Established players have to comply with the new tax mechanism as they don’t deal in cash.

Apart from that, branded apparel firms had to purchase from their bulk consumers ahead of the date of the GST introduction, July 1, to avoid the high tax levy. As a result, they have some additional stocks.

Rahul Mehta, president, Clothing Manufacturers Association of India, said, “Weak consumer sentiment, sharply falling exports, and liquidity shortage are likely to result in stress persisting for a few months more.”

He feels FY18 was a lost year for them. Exports fell 41 per cent in October, continuing the trend seen after the GST because of the withdrawal of duty drawback benefits, and the little depreciation of the rupee has not helped. Diwali and the festive season, according to Mehta, have also not helped much.

The impact was seen on the financial results in the July-September quarter. Both the turnover and net profits of branded apparel firms remained under pressure. “Owing to higher GST rates, branded apparel and retail companies are expected to report lower than usual revenue growth in a seasonally strong quarter while margins for branded apparel companies are likely to be impacted by one-time costs on inventory due to the GST. We recommend investing in the space with a three-four year horizon as companies attain scale by expanding the 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’s roll-out, transition issues, and weak consumer sentiment, especially in July. Although the GST is expected to be a medium-term positive, end-of-season sales in June and consequent drop in footfalls in July, coupled with a one-time GST-related compensation of ~26 crore to the channel, led to a loss in the second quarter.

But there was a recovery in September because of strong festive season sales. Revenue was much lower than expectations at ~1,800 crore, down 4 per cent year-on-year, led by a 7 per cent decline in lifestyle brands, a muted 2 per cent growth rate in pantaloons, and weak growth in fast fashion. This revenue shortfall led to an Ebitda (earnings before interest, taxation, depreciation, and amortisation) margin decline of 220 basis points to 6.6 per cent, excluding the GST write-off.

“Pantaloons witnessed a marginal 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 from ‘hold’ now from ‘buy’,” said Himanshu Nayyar, Analyst, Systematix Shares & Stocks (I) .

Sanjay Lalbhai, chairman and managing director at textile and apparel company Arvind, said: “Whenever there is early Diwali, you tend to lose out in the north. If you compare Diwali to Diwali, the 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.”