This will increase revenue by 38% compared to the pre-pandemic level (fiscal year 2020). The largely non-discretionary nature of demand had allowed the segment to remain resilient even during the peak of the pandemic in fiscal 2021, when revenues only fell 3%.
The operating margin should remain at the current level of 6.3-6.8% thanks to better economies of scale and the gradual impact of inflation on the prices of intermediate consumption, despite normalization of store rents. Credit profiles will also remain strong, characterized by accrued liabilities and healthy balance sheets.
The study is based on analysis of four retailers, which account for about a third of the organized sector revenue of Rs 130,000 crore. “The low organized sector penetration of only 5% across the entire F&G retail market provides players with many opportunities for growth. In addition to deepening their presence in metropolitan and Tier I cities, retailers are also growing rapidly in Tier II and Tier III cities. Interestingly, acreage has increased by 40% over the past two fiscal years as players continue with their expansion plans even during the pandemic, taking advantage of lower real estate prices. The momentum is expected to continue with the area growing 10-12% this fiscal year,” said Naveen Vaidyanathan, Director, CRISIL Ratings.
Retail density (represented in sales per square foot), however, will remain moderately below this fiscal year’s pre-pandemic level due to store additions. While store addition was healthy even during the pandemic years, periodic closings and restrictions on opening hours delayed the break-even point for new stores. This has resulted in 20% lower trade density over the past two fiscal years compared to fiscal 2020.
Organized B&M retailers also face stiffer competition from quick-trade entities that deliver food and groceries within minutes. The two models should coexist. However, B&M retailers continue to dominate when catering to customers for their larger weekly/monthly grocery purchases, as opposed to Quick Trade, which typically caters to smaller, unscheduled purchases from customers who prefer the convenience of home shopping. Additionally, traditional B&M players are also looking to increase their online penetration, especially by partnering with fast-paced players.
The operating margin is expected to remain broadly stable this fiscal year as retailers pass on the sharp increase in commodity prices and continue with cost optimization measures. Notably, with the exception of fiscal 2021 when pandemic-induced restrictions caused revenue to wane and margins to fall to 5.5%, margins remained largely within the 6.0-7% range.
“F&G retailers’ credit profiles will also remain stable, supported by strong cash-generating capacity and low debt on balance sheets. While players are expected to continue with their expansion plans, these will be largely funded by internal charges and large cash surpluses (estimated at Rs 1,500 crore as of March 31, 2022) This will ensure that debt protection metrics such as debt/Ebitda and interest coverage remain at healthy levels by 0.2 times and more than 25 times this fiscal year, compared to 0.25 times and 22 times the previous fiscal year,” said Shounak Chakravarty, Managing Partner, CRISIL Ratings.