How Apparel Retailers will Grow 20-25 pc This Fiscal

Apparel retailers, which could barely break even last fiscal, are expected to log operating margins of 5-7 percent this fiscal, compared to about 9 percent pre-pandemic.

Experts believe improving operating leverage, continued cost rationalization, and prudent inventory management are the reasons behind the improvement in figures. 

Anuj Sethi, Senior Director, CRISIL Ratings said, “Less intensive restrictions and the much shorter duration of the third wave resulted in minimal disruptions in operations of B&M retailers. The sharp recovery seen in the second and third quarters this fiscal, and the expected healthy performance in the fourth quarter, will propel revenue to 75-80 percent of the pre-pandemic level. Revenue is expected to log a healthy 8-10 percent growth next fiscal as well, on sustained footfalls and waning impact of the pandemic, but will still be lower than the pre-pandemic level.”

After declining 40 percent last fiscal because of Covid-19, revenue of brick-and-mortar (B&M) apparel retailers will grow 20- 25 percent on-year this fiscal, driven by a strong recovery in demand despite the third wave of the pandemic, according to a report by Crisil.

Losses last fiscal were funded by raising equity of Rs 2,000 crore, thus limiting the deterioration in capital structure. That, and the recovery in accruals this fiscal will strengthen credit profiles, the report further stated. 

Of these, the top eight apparel retailers, representing a fifth of the sector’s revenue, have seen a strong recovery in the first nine months of this fiscal, with revenue growing 55-60 percent on-year on higher festive and wedding sales.

With retail operations curtailed over the past two years, B&M retailers have augmented their omnichannel presence. Consequently, the share of e-retail sales is seen at 8-9 percent this fiscal, compared with the pre-pandemic level of 4-5 percent.

Apparel retailers renegotiated rentals and entered into revenue-sharing agreements after the first wave of the pandemic. They have also limited seasonal collections, leading to inventory rationalisation and lower working capital requirements.

Gautam Shahi, Director, CRISIL Ratings said, “Higher accruals and the lower incremental working capital requirement will support the financial risk profiles of apparel retailers. Given that sales are yet to reach the pre-pandemic level, capital spends on new store openings are expected to be calibrated, resulting in better debt protection metrics. Interest coverage is set to improve to 4-5 times this fiscal from 1 time last fiscal, while total outside liabilities to tangible net worth ratio is set to improve to 1.4 times from 1.7 times.”

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