Hit by Covid, apparel industry revenue set to fall by this much in FY21

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Published: June 27, 2020 5:30 AM

Apparel retailers are, however, likely to see higher contribution from online channels this fiscal, driven by changing buying pattern of consumers amid the pandemic.

It is expected that demand would recover to pre-lockdown levels only during the October-December festive season.

Store closures, social distancing and lack of demand due to the coronavirus pandemic may cause a 30-35% dent to revenues of the organised apparel retail sector in the current financial year, a report revealed on Friday.

Revenue of the Rs 1.7-lakh crore sector is set to plummet by a third, ratings agency Crisil said. According to it, while operating profitability is expected to be impacted by about 200 basis points, the absolute fall in operating profits will be much sharper, necessitating additional funding, mainly debt, by firms to make up for cash flow shortfalls. This will also affect credit metrics.

On the basis of analysis of a sample of 60 Crisil-rated apparel retailers that represent a third of the sector’s revenue, it is expected that demand would recover to pre-lockdown levels only during the October-December festive season.

Among the apparel segments, sales of the departmental store format, which form a third of revenues of the sample set, will be hit harder, with around 40% decline in revenue. Half of these departmental stores are mainly located in malls and Tier-1 cities.

Value fashion retailers, which account for two-thirds of revenues of the sample set, will see a lower impact to the tune of 30% as these have higher presence in Tier-II and -III cities. A higher proportion of standalone stores are expected to benefit from this down-trading. Declining income levels is also expected to benefit this segment.

Apparel retailers are, however, likely to see higher contribution from online channels this fiscal, driven by changing buying pattern of consumers amid the pandemic.

Gautam Shahi, director of Crisil Ratings, said, “To increase footfalls, retailers may have to offer discounts while also incurring higher costs to ensure adherence to social distancing. On the other hand, we also expect retailers to convert a portion of fixed lease rentals to variable, in addition to pruning employee costs, and other discretionary spends. Considering these aspects, operating profitability will moderate by up to 200 bps this fiscal, from about 7-8% in fiscal 2020.”

According to Crisil, converting lease rentals from fixed to variable is critical, else the margin impact will be severe. Lease rentals and employee costs typically constitute 20% of the overall revenues of the apparel retailers and a large proportion of these costs is fixed in nature.

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