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Gap Battling Effects of India’s Covid Crisis

India’s ongoing—if slowly easing—battle with a crushing wave of Covid-19 is threatening to derail the growth of its $15 billion apparel sector following lockdown restrictions that have quashed local sales, analysts have said, though spiking export orders may be its saving grace.

Because domestic demand comprises nearly three-quarters of its overall revenues, the South Asian nation’s garment industry is now poised to grow between 15 percent and 20 percent this fiscal year—or roughly half of the 28 percent to 33 percent estimated before the current crisis came to a head, according to Crisil Research, a research firm headquartered in Mumbai.

“The first quarter of this fiscal [year] will be a near-washout, with most domestic brick-and-mortar stores shut, and sales through e-commerce channels curbed,” Hetal Gandhi, director of Crisil Research, wrote in a note. “The second wave has also hit [the] hinterland, affecting sales of ‘value’ or affordable garments, which is the fastest-growing segment.”

Indeed, “buoyant” overseas demand, driven by an uptick in discretionary spending in the United States and Europe, where more than 60 percent of India’s clothing exports are destined, will drive most of the improvements in the apparel sector after its bruising 23 percent to 25 percent stumble in 2020. Export orders, which account for 26 percent of overall revenues, should register between 18 percent to 22 percent growth compared with a 16 percent contraction last year, analysts said.

Other analytics companies have also trampled any notions of a swift recovery, albeit with a few bright spots.

In April, Icra Ratings, which is part of Moody’s Investors Services, estimated that India’s RMG sector isn’t likely to recover to pre-pandemic levels until at least 2023.

The agency said the country’s garment manufacturers are likely to report double-digit growth in fiscal year 2022 on a “low base,” achieving between 85 percent to 95 percent of their pre-Covid-19 turnover levels.

“The trend seen in FY21 is corroborated from the rating movements as well,” Jayanta Roy, senior vice president and group head, corporate sector ratings, at Icra, wrote in a note. “While the credit ratio (ratio of upgrades to downgrades) for apparel companies remained at less than 1 in FY21, reflecting a weakening of the credit profiles amid Covid-19-induced challenges, nearly two-thirds of the downgrades happened in the initial seven months of FY21, with downgrade pressures subsiding significantly from November 2020 onwards.”

Crisil Ratings says it expects a modest improvement in year-over-year operating profitability by 75 to 100 basis points to 5.5 percent to 6 percent this fiscal year. The working capital position of apparel manufacturers is also expected to rebound “close” to pre-pandemic levels this fiscal year, aided by “prudent” inventory management and the normalization of the debtor cycle.

“The credit ratio (ratio of rating upgrades to downgrades), which was 0.16 last fiscal [year], should improve this fiscal [year] as the credit outlook of RMG makers turns ‘stable’ from ‘negative,’” said Kiran Kavala, associate director at Crisil Ratings, “Key debt protection metrics are also seen improving due to better business performance and working capital management. For instance, interest coverage ratio is expected to improve to around 2 this fiscal [year] from 1.5 times last fiscal [year].”

Even so, sourcing disruptions as a result of India’s woes have had spillover effects on the rest of the global supply chain, with long-term repercussions that still remain to be seen.

In a recent earnings call, Gap Inc., which also owns Athleta, Banana Republic and Old Navy in addition to its namesake brand, admitted to sourcing challenges from supplier countries such as India, including roughly 200 basis points of “shipping headwind” over the past quarter due to delays in cargo flows.

“We’re looking closely at all of that and working hard to do what we’ve been doing, which is use our pricing power to offset all of those issues,” said Katrina O’Connell, the company’s chief financial officer. “Honestly, what we don’t know is, as the vendors are more impacted by the Covid outbreaks in India and Southeast Asia, how much we will or won’t have to air [freight] in order to get [products] here or if there will be freight implications.”

Whether production can keep up with the mounting overseas demand is also a question, since some factories have had to shutter during regional lockdowns. There is also a looming labor shortage. According to a survey by the Clothing Manufacturers Association of India, published in early May, 64 percent of its members’ factories saw more than half of their workers return to their hometowns.

Julie Whalen, chief financial officer at Williams-Sonoma, which also owns Pottery Barn and West Elm, noted in an earnings call in late May that Covid-related delays from India are impacting the production of its home goods. “As a result of these challenges, we expect backorder levels to remain elevated until at least the third quarter of this year,” she said.

Another hurdle: Some 80 percent of world goods trade by volume is carried on ships, and India supplies many of their crews, according to the United Nations World Conference on Trade and Development, which means the crisis could have cumulative effects elsewhere. With many countries banning flights from India, moving Indian workers to ports around the world and changing crews have been challenging—if not next to impossible—causing further bottlenecks.

Mansukh Mandaviya, India’s federal junior minister of ports, shipping and waterways, said Saturday that all efforts should be made to get the seafarers vaccinated.

“India plays a very significant role in the global seafarer industry. There have been demands from many quarters to accord priority to seafarers in the vaccination drive in view of the nature of their work,” he said in a statement. “The ministry of ports, shipping and waterways also coordinated actively with the ministry of health and family welfare to give priority to seafarers in Covid-19 vaccination.”

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