MUMBAI: Lower exports due to the higher tariffs from the US and the pressure on pricing will lead to contraction in the operating margins of apparel exporters to the tune of by 200-300 bps this fiscal in general and more for those with higher revenue dependence on the US. This will have the industry as a whole looking at a revenue shrinkage of 6-9% this fiscal, according to a report by rating agency Icra Ratings which has also revised down its outlook to negative from stable.
If the 50% tariffs on shipments to the US continue, we expect revenue of apparel exporters to decline by 6-9 percent in FY26, in spite of the implementation of the free trade agreement (FTA) with England and diversion of supplies to other geographies. As a result, we forecast their operating profit margins to compress to around 7.5% from 10% in FY25,” Icra said in a note on Monday.
The US accounts for only 6 percent of total apparel exports as of March 2025.
Significantly, the agency has not factored in the impact of GST reduction on the industry, especially from a likely boost in domestic demand, which is the primary direct objective of the tax reduction to partly blunt the pressure from shrinking exports.
Apparel exports have been largely flat in the past five years due to subdued demand in some of the key end-markets and shift in sourcing to Bangladesh and Vietnam, collectively leading to a lower offtake from importers from England, the UAE etc. But exports to the US, which is only 6% grew 4.8% during this period as exporters focused on volume-led US market.
With the US tariff hitting 50 percent, over and above the baseline rates, the competitiveness of our apparel exporters will come under pressure and thus impact their revenue growth prospects and margins, especially in the second half as first half saw ramped up bookings ahead of the tariffs.
According to Srikumar K, a senior vice-president at the agency, the steep US tariffs is a material setback for apparel exporters with a high dependence on the US market. New orders are likely to be hit and margin pressures are imminent, even if some part of the tariff increase burden is passed on to US importers.
Assuming the new tariffs continue, we expect revenue to shrink by 6-9% in FY26 with consequent impact on operating profit margin to be 200-300 bps decline. Unless the tariffs are talked down there could be more disruption in business.
While advancing shipments in H1 has cushioned the revenue impact for the full-year, implementation of the FTA with England and diversion of supplies to other geographies is expected to support revenue in FY27.
Accordingly, the operating margin of exporters are expected to moderate to around 7.5% in FY26 from 10 percent in FY25. Decline in operating margins will be primarily attributed to discounts provided and a reduction in the operating scale.
Meanwhile, domestic cotton yarn prices was flat in FY25 on an annualized basis and are likely to moderate to an extent with import duty exemption on cotton imports till December 2025.