The revenue of brick and mortar (B&M) apparel retailers, which declined 40% in the previous financial year, will grow 20-25% in the current fiscal, driven by a strong recovery in demand. This is despite the impact of the third wave of the pandemic, according to a report by Crisil Ratings.
The apparel retailers’ profitability, which could barely break even in the last fiscal, should log operating margins of 5-7% this fiscal, compared with 9% recorded during the pre-pandemic time. The profitability would be backed by improving operating leverage, continued cost rationalisation and prudent inventory management by the retailers, the report said.
“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,” Crisil Ratings’ senior director Anuj Sethi said.
“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,” he added.
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 have also limited seasonal collections, leading to inventory rationalisation and lower working capital requirement.
“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 spends on new store openings are expected to be calibrated, resulting in better debt protection metrics. Interest coverage is set to improve to 4-5 times this fiscal from one-time last fiscal, while total outside liabilities to tangible net worth ratio is set to improve to about 1.4 times from 1.7 times,” Crisil Ratings’ director Gautam Shahi said.
However, future Covid waves, consumer spends around apparels and sustainability of cost optimisation measures remain key monitorables for the sector.
Losses of last fiscal were funded by raising equity of about Rs 2,000 crore, thus limiting the deterioration in capital structure. That and the recovery in accruals this fiscal will strengthen credit profiles, the study said.
Crisil Ratings analysed 35 apparel retailers, who account for a fourth of the sector’s revenue. 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% year-on-year on higher festive and wedding sales, it added.
