A broad-based demand revival, with increased footfalls and recovery in discretionary consumer spending, will help the organised brick-and-mortar (B&M) retail sector revenue reach the pre-pandemic mark of Rs 5.7 lakh crore with a 23-25 percent spurt next fiscal.
“The growth will ride on a low base as the sector is set to log an estimated 19-22 percent revenue de-growth this fiscal due to the pandemic, which led to temporary store closures and restricted footfalls in the first half,” a study of 145 B&M retailers rated by CRISIL Ratings indicates.
For the record, sales had recovered to over 80 percent of pre-pandemic levels in the third quarter and are expected to recover almost fully by the close of the current quarter. The rate of recovery has varied across segments, with the food and grocery (F&G) retail segment rebounding faster than discretionary segments such as fashion and apparel retail. The consumer durables and electronics retail segment has also recovered relatively swiftly owing to lifestyle changes spurred by the lockdown restrictions.
Operating profitability is also expected to recover sharply next fiscal. Along with higher revenue, this will enable a recovery in cash accruals, benefitting debt metrics and consequently stabilising credit profiles in the sector. This fiscal, debt metrics have moderated due to a significant dent in cash accruals.
“The recovery in revenue and continuation of a part of the cost rationalisation measures adopted will help resurrect operating profitability1 for B&M retailers to the pre-pandemic level of 5-6 percent next fiscal, from just ~2 percent (moderation of 300-400 bps) this fiscal,” Anuj Sethi, Senior Director, CRISIL Ratings Ltd says.
The impact on operating performance this fiscal is visible in revenue per square feet (for select set of companies2) moderating by estimated 40 percent and 8 percent for apparel and F&G, respectively.
Ergo, cash accruals will be materially lower this fiscal, especially in discretionary segments such as apparel and consumer durables retail. That could affect debt metrics and credit profiles. A fifth of CRISIL-rated apparel and consumer durable B&M retailers had seen negative rating action (downgrades or outlook change) in March-December 2020. Some cushioned the impact on their credit profiles by preserving liquidity, deferring capital spend, limiting external debt, and raising equity.
“Healthy business performance will enable liquidity and debt metrics to recover next fiscal, lending stability to the credit profile of B&M retailers. With capital spending on new stores expected to be more gradual, leverage reflected in Debt/EBITDA is likely to recover to below 2 times next fiscal, from over 4 times in fiscal 2021. Also, the interest cover ratio is seen improving to over 5 times next fiscal from ~2 times this fiscal,” Sushant Sarode, Associate Director, CRISIL Ratings Ltd, says.
Further, the retail sector’s long-term growth prospects remain healthy, given low penetration of organised retail. Retailers with omni-channel presence, large scale, healthy balance sheets, and strong parent support will be better placed to capture growth opportunities.
Any resurgence of Covid-19 cases impacting store operations of retailers will remain a key monitorable.