Apparel retailers could hit 23% revenue growth despite inflation

Apparel retail in India is expected to grow up to 23% of its revenue in the current fiscal year ending March 2023, driven by strong same-store sales, increased online sales and to aggressive store expansions, according to a report by credit rating agency Crisil. Tuesday. This growth of about 500 basis points (bps) above the pre-pandemic level (fiscal 2020) comes “despite high inflation which is impacting discretionary demand,” Crisil said.

According to the report, apparel retailers’ operating margin will improve by 175-200 basis points year-on-year to 7.75-8%, driven by increased scale resulting in better absorption of fixed costs, price increases and a greater share of their house brands. . However, the higher cost of inputs for brands and retailers will play a little spoilsport. “Higher input prices will cap the operating margin at 50-70 basis points below pre-pandemic levels. Among major inputs, domestic cotton prices nearly doubled between April 2020 and May 2022. Despite some moderation since June 2022, they are expected to remain higher than before the pandemic,” Crisil said in the statement.

The ratings agency also pointed out that apparel retailers have managed their balance sheets well during the pandemic with timely fundraising that has helped them mitigate the impact of revenue and profitability volatility. “Now, given improved revenues and profitability, and therefore higher operating cash, apparel retailers are well positioned to invest in increasing in-store and online presence, which which will gradually benefit their credit profiles,” the report said.

Crisil further stated that the potential improvement in demand will encourage apparel retailers to increase their capital expenditure or Capex by more than 30% this fiscal year. “Besides expanding stores, adding warehousing space and investing in brand acquisitions, a significant portion of spending would be increasing technology platforms and online offerings. The share of online channels in overall apparel retailer revenue is expected to cross 15% in this fiscal year from around 5% in fiscal 2020,” he added.

The Crisil report is based on a study of 46 apparel retailers who account for more than a third of the organized sector’s total annual revenue of around Rs90,000 crore.