Get App
Fashion retailers’ revenue growth is set to moderate in the current fiscal amid inflationary headwinds after the industry reported a whopping 51% YoY revenue growth in FY23, according to rating agency ICRA. The rating agency analysed 11 listed retail entities in its sample set and estimated that the revenue growth will ease to 10% in FY24.
The rating agency further said that the operating margin of the retailers is likely to decline by 100 basis points to about 5.7%, due to lower demand and high spending on advertisement and promotion expected during the current fiscal.
“The slowdown has been more pronounced in the value fashion segment, where the average sales per square feet still remains lower than pre-pandemic levels and has been witnessing a QoQ decline since Q3 FY2023,” said Sakshi Suneja, Vice President & Sector Head, – Corporate Ratings, ICRA
Suneja further said that though the premium segment remained resilient till December 2023, premium segment also started showing signs of demand slowdown in Q4FY23. Its average sales per square feet continued to remain below the pre-Covid levels.
The rating agency expects demand pressure to continue till H1FY24, with the sector expected to show improvement only with the onset of the festive season. This, coupled with regular network expansion, will translate into an estimated 10% revenue growth in FY24, ICRA noted.
Retail Store Expansion
Retail space addition, which was limited in FY21, resumed in FY22 and FY23 with an addition of nearly 5.2 million square feet, a growth of 30% over the retail space as on March 2021.
The total capital expenditure spent on adding new stores by ICRA’s sample set of listed entities jumped 60% YoY to Rs 1,460 crore in FY23, despite a slowdown in the value fashion segment. This strong growth was partially supported by a low base from the previous year.
Moreover, retailers have not announced any significant reduction in capex, on account of likely revival in demand and favourable long-term prospects for the Indian retail industry. As a result, the capex allocation for store additions is expected to further rise by 10% in FY2024, reaching Rs. 1,600 crore.
The rating agency also said that online sales accounted for only about 8% of the overall revenues of entities in ICRA’s sample set and are likely to increase to 10-12% by FY2025-26. Suneja added that sales through the online channels, which were earlier expected to grow at a faster pace, have now slowed down.
Further, due to the low level of penetration of organised segment within the apparel retail and loss-making nature of online operations necessitating substantial investments, physical store expansion is the preferred growth route for the retailers, especially in Tier-II and III cities. Suneja further said that post the pandemic, retailers have also recalibrated their focus towards expansion via offline retail stores.
Financial Health
Though revenue growth was strong in FY2023, operating profit margin trailed their prepandemic levels by 100 bps, given the lower-than-expected demand and steep increase in advertisement and promotion expenses undertaken by the retailers to make up for the lost sales of FY2021 and FY2022.
Many major retailers have also acquired and launched brands in new categories, particularly in the ethnic wear sector, and have made significant investments to expand these brands. Currently, retailers have not shown any intention of reducing advertising expenditures in the upcoming quarters, as they anticipate a recovery in demand during the second half of the current fiscal year 2024. ICRA also predicts an increase in discount levels in the first half of the current fiscal year as retailers aim to boost sales, which may put some pressure on gross margins.
ICRA expects the credit profile of large, listed entities to moderate in FY2024 due to substantial capital expenditure plans and likely decline in earnings. However, the credit profile will improve in FY2025 as demand conditions strengthen. The total debt-to-operating profit ratio is expected to rise to approximately 1.9 times in FY2024, compared to 1.3 times in FY2023, while the interest coverage ratio is projected to moderate to 8 times in FY2024, down from approximately 13 times in FY2023.
Stocks To Watch
Aditya Birla Fashion & Retail, Shopper Stop, Trent, V-Mart, V2 Retail, Vedant Fashions, and Reliance Retail and Fashion Lifestyle Limited (RIL).