Retail apparel companies’ revenues are set to fall 30-35 per cent this fiscal on the back of temporary store closures, restricted mobility and sharp fall in the income levels of consumers. The annual revenue of the organised retail apparel sector is estimated at ₹1.7-lakh crore.
With the operating profit margin expected to drop by 200 basis points from the 7-8 per cent logged last fiscal, the absolute fall in operating profits will be much higher, necessitating additional funding — mainly debt — by firms to make up for cash flow shortfalls. This will affect credit metrics, said a Crisil Ratings report.
A majority of the retail stores are expected to reopen soon, with the staggered easing of the lockdown. However, demand is expected to recover to pre-lockdown levels only during the October-December festival season.
Pent-up demand, and consumers’ spending behaviour post the lifting of the lockdown, will have a bearing on the pace of recovery, said the report.
Apparel segment sales at departmental stores will be hit harder, with a 40 per cent decline in revenue, as most of them are located in malls and tier 1 cities. For value fashion retailers, the impact will be lower, at 30 per cent, as they have a larger presence in tier 2 and 3 cities, said Crisil.
However, standalone stores are expected to benefit from down-trading, and the decline in income levels will also benefit this segment.
Increased costs
Gautam Shahi, Director, Crisil Ratings, said that to increase footfalls, retailers have to offer discounts while also incurring higher costs to ensure adherence to social distancing. Retailers are also expected to convert a portion of fixed lease rentals to variables and cut employee cost.
Ankit Hakhu, Director, Crisil Ratings, said the debt protection metrics of apparel retailers in the last two fiscals have remained healthy, supported by a strong operating performance and prudent capital expenditure. However, weakened business levels and lower profitability will lead to a fall in interest coverage ratio to three times this fiscal from five times in the past two fiscals.