Crisil: Apparel Retailers Expected to Grow 20-25% This Fiscal Year: Crisil
Apparel retailers, which could barely break even last fiscal year, are expected to see operating margins of 5-7% this fiscal year, down from around 9% pre-pandemic, thanks to improved operating leverage, continued cost rationalization and prudent inventory management.
Last year’s losses were funded by increasing equity by Rs 2,000 crore, thus limiting the deterioration of the capital structure. That, and the resumption of accrued liabilities this fiscal year will strengthen credit profiles, according to an analysis of nearly 35 apparel retailers assessed by CRISIL Ratings, representing a quarter of industry revenue.
Of these, the top eight apparel retailers, accounting for one-fifth of industry revenue, experienced a strong recovery in the first nine months of this fiscal year, with revenue growing 55-60% year-on-year thanks to higher party and wedding sales.
Anuj Sethi, Senior Director, CRISIL Ratings, said: “Less intensive restrictions and the much shorter duration of the third wave have resulted in minimal disruption to B&M retailer operations. The strong recovery seen in the second and third quarters of this fiscal year and the strong performance expected in the fourth quarter will propel revenues to 75-80% of the pre-pandemic level. Revenues are also expected to show healthy growth of 8-10% in the next fiscal year, driven by strong footfall and the waning impact of the pandemic, but will remain below pre-pandemic levels.
With retail operations having been reduced over the past two years, B&M retailers have increased their omnichannel presence. Therefore, the share of online retail sales is estimated at 8-9% for this fiscal year, compared to the pre-pandemic level of 4-5%.
Apparel retailers renegotiated rentals and struck revenue-sharing deals after the first wave of the pandemic. They also limited seasonal collections, which led to inventory rationalization and lower working capital requirements.
Gautam Shahi, Director of CRISIL Ratings, said: “Higher accrued expenses and lower additional working capital requirement will support the financial risk profiles of apparel retailers. Given that sales have yet to reach pre-pandemic levels, capital expenditures for new store openings should be calibrated, resulting in better debt protection metrics. Interest coverage is expected to improve to 4-5x this fiscal year from 1x last fiscal year, while the ratio of total external liabilities to tangible net worth is expected to improve to 1.4x from 1, 7 times.