Organised sector brick and mortar apparel retailers are set to post a revenue growth of 7-8 per cent this fiscal, buoyed by festival and marriage season demand, said a report by CRISIL Ratings. This is despite inflation impacting discretionary spending in the first quarter. The growth during the fiscal and over the medium term will also be facilitated by continued store expansion, including to tier-II and -III cities. Despite the moderation, revenue growth will be comparable to the ~8 per cent range seen before the pandemic, it said.
Last fiscal, retailers had recorded a strong 38 per cent growth on a low base, driven by swift recovery from the pandemic-induced slump and higher realisations following a steep increase in raw material prices, which was passed on. Operating margins are seen range bound at ~8 per cent this fiscal, as improving product mix in favour of the premium segment and lower input costs offset the impact of higher marketing spends.
The pace of store area addition will normalise to the pre-pandemic level of ~2.2 million square feet in fiscal 2024, compared with ~3.7 million square feet last fiscal. This, and steady accrual will limit reliance on external debt and keep credit risk profiles ‘Stable’, said the ICRA report. CRISIL Ratings analysed 39 organised apparel retailers, which accounted for a fourth of the ~Rs 1.9 lakh crore revenue last fiscal, to reach the conclusions.
Anuj Sethi, Senior Director CRISIL Ratings, said, “Demand from the premium segment is rising gradually with consumers increasingly preferring branded garments, driven by return to office and buoyant corporate activity. This is helping offset muted-to-low demand from the economy and value segments (~60 per cent of total revenues) because of changes in discretionary purchasing decisions, including due to rise in food inflation, in the recent past. With continuous store expansion, and the onset of the festive and wedding season, demand should improve materially in the third quarter (~35 per cent of annual revenues) and a part of the fourth quarter, supporting revenue growth.”
Last fiscal, despite strong growth, revenue density (calculated as revenue per square feet) was below the pre-pandemic level due to substantial area added under new stores. The metric is expected to improve this fiscal with the pace of area addition normalising and demand from the premium category — the high-end apparels and ethnic wear segments — rising. Yet, overall revenue density will remain below the pre-pandemic peak of ~Rs 11,700 per square feet. Additionally, the share of online sales in overall revenue, which doubled to ~8 per cent last fiscal from pre-pandemic levels, is expected to stabilise as consumers mix online and physical shopping.
Operating margin, CRISIL said, is seen at previous year’s level of ~8 per cent despite significant reduction in prices of key raw materials, that is, cotton. It has corrected ~20 per cent in the firs four months of fiscal 2024, over average of fiscal 2023. “This is largely due to continuing aggressive marketing strategy including various offers/ discounts to boost consumer sentiment and revive discretionary spend,” it said.
While store expansion in metros and tier-I cities will continue, retailers are also expanding to tier-II and -III cities, which will be relatively smaller-sized outlets. Hence, the pace of area addition will normalise to pre-pandemic levels this fiscal. “That, coupled with continuing investments to augment technology platforms and omni-channel infrastructure for online offerings, will keep annual capital spending at last fiscal’s level of ~Rs 2,000 crore,” CRISIL said.
Shounak Chakravarty, Associate Director, CRISIL Ratings, said, “While the capex will be partly debt funded, stable cash flows will ensure debt metrics remain adequate, lending stability to credit profiles. We expect interest coverage and total debt/EBITDA ratios of CRISIL Ratings rated apparel retailers to remain in line with previous fiscal’s level of ~8 times and 1.5 times, respectively.” In the road ahead, CRISIL said, the ability to sustain margins, trends in commodity inflation, and impact of erratic monsoon and inflationary pressures on purchasing power in the rural and semi-rural areas will bear watching.