Clothing retail forecasts 25% revenue growth this fiscal year: Crisil Ratings

NEW DELHI : After a 40% decline in physical apparel (B&M) retailer sales in the last fiscal year, it is expected to increase by 20-25% this fiscal year, despite the third wave of the pandemic, according to the CRISIL ratings.

Profitability for apparel retailers is expected to record operating margins of 5-7%, down from 9% before the pandemic and could barely break even last fiscal year.

Last year’s losses were financed by raising equity from 2,000 crore, thus limiting the deterioration of the capital structure. This, and the resumption of accrued liabilities this year will strengthen credit profiles.

An analysis of 35 clothing retailers assessed by CRISIL Ratings, representing a quarter of the sector’s turnover, indicates this.

Of these, the top eight apparel retailers, accounting for one-fifth of industry revenue, experienced a strong recovery in the first nine months of this fiscal year, with revenue growing 55-60% year-on-year thanks to higher party and wedding sales.

“Less intensive restrictions and the much shorter duration of the third wave have resulted in minimal disruption to B&M retailer operations. The strong recovery seen in the second and third quarters of this fiscal year and the strong performance expected in the fourth quarter will propel revenues to 75-80% of the pre-pandemic level. Revenues are also expected to see healthy growth of 8-10% in the next fiscal year, due to sustained footfall and the waning impact of the pandemic, but will remain below pre-pandemic levels,” said Anuj Sethi, Senior Director, CRISIL Ratings.

With retail operations having been reduced over the past two years, B&M retailers have increased their omnichannel presence. Therefore, the share of online retail sales is estimated at 8-9% for this fiscal year, compared to the pre-pandemic level of 4-5%.

Apparel retailers renegotiated rentals and struck revenue-sharing deals after the first wave of the pandemic. They also have limited seasonal collections, resulting in inventory rationalization and lower working capital requirements.

“Higher accrued expenses and lower incremental working capital requirement will support apparel retailers’ financial risk profiles. Given that sales have yet to reach pre-pandemic levels, capital spent for new store openings should be calibrated, resulting in better debt protection measures Interest coverage should improve to 4 to 5 times this fiscal year compared to the prior year, while the ratio of total external liabilities to tangible net worth is expected to improve to around 1.4x from 1.7x,” said Gautam Shahi, Director of CRISIL Ratings.

Future waves of Covid, consumer spending around clothing and the sustainability of cost optimization measures will remain key things to watch.

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