Apparel retail set for 25% revenue growth this fiscal: Crisil Ratings
Premium- The profitability for the apparel retailers should log operating margins of 5-7%, compared to the 9% pre-pandemic and that it could barely break-even last fiscal
NEW DELHI : After a 40% decline in the revenue of brick and mortar (B&M) apparel retailers during the last fiscal, it is expected to grow 20-25% this fiscal, despite the third wave of the pandemic, according to CRISIL ratings.
The profitability for the apparel retailers should log operating margins of 5-7%, compared to the 9% pre-pandemic and that it could barely break-even last fiscal.
The losses last fiscal, were funded by raising equity of ₹2,000 crore, thus limiting the deterioration in capital structure. That, and the recovery in accruals this fiscal will strengthen credit profiles.
An analysis of 35 apparel retailers rated by CRISIL Ratings, accounting for a fourth of the sector’s revenue, indicates as much.
Of these, the top eight apparel retailers, representing a fifth of the sector’s revenue, have seen strong recovery in the first nine months of this fiscal, with revenue growing 55-60% on-year on higher festive and wedding sales.
“Less intensive restrictions and the much shorter duration of the third wave resulted in minimal disruptions in operations of B&M retailers. The sharp recovery seen in the second and third quarters this fiscal, and the expected healthy performance in the fourth quarter, will propel revenue to 75-80% of the pre-pandemic level. Revenue is expected to log a healthy 8-10% growth next fiscal as well, on sustained footfalls and waning impact of the pandemic, but will still be lower than the pre-pandemic level," said Anuj Sethi, Senior Director, CRISIL Ratings.
With retail operations curtailed over the past two years, B&M retailers have augmented their omni-channel presence. Consequently, the share of e-retail sales is seen at 8-9% this fiscal, compared with the pre-pandemic level of 4-5%.
Apparel retailers renegotiated rentals and entered into revenue-sharing agreements after the first wave of the pandemic. They also have limited seasonal collections, leading to inventory rationalization and lower working capital requirement.
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“Higher accruals and lower incremental working capital requirement will support the financial risk profiles of apparel retailers. Given that sales are yet to reach the pre-pandemic level, capital spent on new store openings is expected to be calibrated, resulting in better debt protection metrics. Interest coverage is set to improve to 4-5 times this fiscal from 1-time last fiscal, while total outside liabilities to tangible net worth ratio is set to improve to ~1.4 times from 1.7 times," said Gautam Shahi, Director, CRISIL Ratings.
Future Covid waves, consumer spends around apparels and sustainability of cost optimization measures will remain key monitorables.
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