Revenues of Indian Food and Grocery Retailers to Grow by 15-20 pc YoY in FY2023
Revenues of Indian Food and Grocery Retailers to Grow by 15-20 pc YoY in FY2023

Indian organized food and grocery (F&G) retailers are expected to witness healthy YoY revenue growth of 15-20 percent in FY2023. The increased footfalls aided by the lifting of restrictions, continued healthy demand for essential products and regular expansion of retail areas under operations are some of the key revenue drivers. 

According to ICRA’s recent note on the sector, the operating profit margin (OPM) is, however, expected to remain range-bound at 5-6 percent in FY2023, due to inflationary pressures, which has also adversely impacted demand in the non-food category. Given the expectation of healthy revenues and steady earnings, the rating agency’s outlook on the sector is Stable.

"F&G sector remained resilient during the Covid waves and reverted to the pre-Covid level of sales in Q3 FY2021 itself. Revenue growth since then has remained healthy, with entities in ICRA’s sample set reporting YoY revenue growth of 21 percent in FY2022. Demand for essential products remained strong in YTD FY2023 as well, with entities in our sample set expected to surpass their pre-pandemic levels of FY2020 by ~36 percent in FY2023," said Sakshi Suneja, Vice President and Sector Head, ICRA.

More than 90 percent of the total cost of F&G retailers comprises raw material cost/purchase of traded goods, given the dominance of food and staples in their revenue mix. The share of non-food categories, commanding relatively better margins in the revenue mix, moderated to 22 percent in FY2021 from ~28 percent in FY2019, amid intermittent restrictions on the sale of non-essential items. Despite the lifting of restrictions, the share of non-food categories is yet to pick up and remained at lower than pre-pandemic levels at ~23 percent in FY2022 and in H1 FY2023. While this will impact the gross margins in FY2023, the benefits of operating leverage stemming from the increase in revenues shall help offset this, leading to range-bound OPMs of 5.6-6 percent (similar to that seen in the pre-pandemic period).

F&G retailers expanded their retail area under operations by ~40 percent during FY2021 and FY2022, led by strong demand during the pandemic as well as attractive rentals. Driven by a healthy demand outlook, retailers are expected to continue with their store expansion plans in FY2023. Entities in ICRA’s sample set are likely to further increase their retail area by ~15 percent in FY2023, entailing a capital outlay of Rs 20 billion. 

Retailers will also continue focusing on increasing online sales, the share of which is expected to increase to go up to ~8 percent of revenues in FY2023, vis-à-vis 4 percent in FY2021. Retailers are also pursuing calibrated investments in this space to restrict cash burn.

“We expect brick-and-mortar stores to account for the majority of the retailers’ revenues in the organized F&G sector. This is despite the heightened competition from quick commerce, which largely caters to unplanned or spontaneous purchases, and primarily impacts sales of kirana stores belonging to the unorganized segment,” said Priyesh Ruparelia, Vice President and Co-Group Head, ICRA.

Notwithstanding the large Capex plans, the credit profile of large, listed entities is expected to remain adequately supported by strong balance sheets and healthy liquidity with ~Rs 1,600 crore of cash and liquid investment balances as on March 31, 2022. Their credit metrics too would remain comfortable with the total debt-to-operating profit ratio expected to remain below 0.5 times for entities in the sample set as on March 31, 2023.
ICRA has not factored in any adverse impact of new covid waves in its base case. While new covid waves are unlikely to materially impact the operations of F&G retail entities, any prolonged restrictions on store operating hours or on the sale of general merchandise will pose a downside risk to such retailers’ financial performance.

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