By Nitya Pandit
Though apparel giants have reported revenue growth, they are yet to reap any benefits from it as they struggle to generate profits. However, the development of the branded garment segment in the apparel market may help the likes of Aditya Birla Fashion and Retail Ltd. (AB Fashion) generate profits in the future. Additionally, the leading apparel companies must focus on their input costs and consumer demand.
While big companies like Arvind Ltd., AB Fashion, and Raymond Ltd. have reported double digit revenue growth, Arvind’s earnings per share dropped by 19% and the rest reported losses. Furthermore, Arvind has been facing a steady decline in its profitability over the whole of last year and AB fashion’s margin softened in Q1. The aftermath of this problem is the growing number of ‘end-of-season’ sales. Keeping this situation in mind, analysts have reduced these companies’ earnings estimates by 7% (for the fiscal year 2018).
However, they have maintained their estimates for the fiscal year 2019. Similarly, ICICI Securities Ltd. has decreased its estimates for AB Fashion, given its ongoing losses. Regardless of the earning cuts, the analysts’ views of the stocks haven’t changed. Since the double-digit revenue growth, in absolute terms, will be added to the operating profits, the firms are not too worried about their losses.
Revenue growth in spite of losses?
In June, Arvind’s earnings decline might have stemmed from the strengthened rupee and high raw material prices. The real reason, however, that has helped the firms experience revenue growth is the growing importance of branded apparel. The June quarter gives us insights into how branded segment of the apparel market has helped boost the revenue of these big companies.
The branded segment helped Arvind achieve an 18% revenue growth while textiles only grew by 14% even though it contributes to half of the firm’s revenues. Even Raymond was backed by its branded apparel segment, without which it would’ve only grown by about 1%. The trend observed suggests that the branded apparel segment is slowly becoming the strong growth driver for most of these apparel giants. The brands and retail business are estimated to overtake the growth rates of textile by more than double.
One catch with this trend is the profit generation. Currently, the branded apparel segment continues to be in the investment phase and provides a low contribution to the earnings. Also, with textile business becoming sluggish, companies are moving towards branded apparel to ensure the growth of their businesses. Analysts are speculating a rise in profitability once the branded apparel segment increases in scale. Meanwhile, the apparel giants should balance between the traditional textile and their new, emerging businesses.
What does the future look like?
In a speech by Prime Minister Modi in June, it was stated that the apparel market is expected to grow from its current valuation of $85 billion to $160 billion by 2025. Also, the Indian textile and apparel exports in the next 4 years are presumed to increase to $82 billion and to achieve this, the government has already approved the setting up of apparel parks for exports at 12 locations.
With the expansion of fashion brands and growth of online shopping, the branded garment segment is believed to increase. Also, Raymond might reinvent its male grooming sector by introducing new forms of shampoos and deodorants. Thus, diversification might be another attempt of the businesses to overcome the challenge of profitability.
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