The fashion retail sector is witnessing healthy sales growth in FY2023 led by a pick-up in discretionary spending and normalization of store operations post the pandemic. Retail entities in its sample set will see an exuberant YoY increase in sales of nearly 45 percent in FY2023.
According to ICRA's most recent analysis of the industry, their operating profit margins (OPMs) are, however, expected to remain range-bound at 7-7.3 percent, due to significant increases in advertisement and promotion spending during the year. The rating agency currently has a stable outlook on the retail sector.
"Driven by improved economic activity and an uptick in discretionary spending, the retail sector reported a robust 55 percent YoY revenue growth in 9M FY2023. While this was admittedly partly led by a low base, it also reflects a sharp 35 percent growth over the pre-pandemic period of 9M FY2020,” said Sakshi Suneja, Vice President and Sector Head- Corporate Ratings, ICRA.
She further added, “This favorable performance was also aided by nearly 5 million sq. ft of additional store space set up during FY2020-FY2022. Segment-wise, the revenue growth is led by premium brands in the metros/Tier I cities. The value-fashion segment, on the other hand, is facing inflationary headwinds and reported a negative same-store-sales growth when compared with the pre-covid period of 9M FY2020.”
While the 55 percent revenue expansion achieved in 9M FY2023 factored in the seasonally strong Q3, the same is likely to sequentially moderate in Q4, translating to the projected 45 percent YoY revenue growth for FY2023 as a whole. The gross margins for the retailers in 9M FY2023 remained largely in line with the FY2022 levels, as the retailers passed on increased raw material costs (led by the increase in cotton prices) to end-consumers.
The other key cost heads for a retailer include rental, employee costs, and selling/promotional expenses, which together account for about 30 percent of the total cost. During FY2023, while rental expenses reverted to pre-pandemic levels, advertising and promotion expenses witnessed a steep increase, as retailers resumed these spending after a hiatus of nearly two years. Consequently, despite robust revenue growth, OPMs of fashion retailers are likely to remain range-bound at around 7-7.3 percent in FY2023, trailing the pre-pandemic OPM.
Following a lull in FY2021, retailers resumed their store expansion plans in FY2022, which have continued in FY2023 as well. This was also enabled by the large equity raisings in FY2021, coupled with improved cash flows during FY2022 and YTD FY2023.
Elaborating further, Suneja, said, “Entities in our sample set increased their capital spending to Rs 14 billion in FY2023, implying a YoY expansion of 55 percent. While players present in the value-fashion segment continued with their capex plans in FY2023, ICRA expects some curtailment/re-calibration in capex spending by these players in FY2024, till inflationary pressures ease. Online sales also continue to grow, though at a slower pace, with the waning impact of the pandemic. ICRA expects the share of online sales to inch up to 12-14 percent of revenues by FY2024/25, vis-à-vis 8 percent in FY2022. This is, however, unlikely to replace the brick-and-mortar sales model any time soon.”
Despite the sizeable capex plans, the credit profile of large, listed entities is expected to remain adequately supported by strong balance sheets, as is evinced by the healthy liquidity (Rs 2,200 crore of cash and liquid investment balances vis-a-vis total debt of Rs 2,400 crore as on September 30, 2022) and strengthened net worth post the equity raisings in FY2021. This, coupled with improved cash flows in FY2023, would keep the credit metrics of entities in ICRA’s sample set comfortable, with the total debt-to-operating profit expected to improve to below 1 time and interest cover to improve to 9 times in FY2023, from 1.4 times and 6.7 times, respectively, in FY2022.