Apparel retailers’ sales to grow 21-23% in FY23, says CRISIL

Apparel retailers are expected to see a rise of 21-23% revenue growth in the current fiscal, driven by strong same-store sales, new store launches and higher contribution from online channels, according to CRISIL rating agency. The sales of apparel retailers will be about 500 basis points (bps) more than the pre-pandemic level, despite elevated inflation impacting discretionary demand.

CRISIL Ratings Director Naveen Vaidyanathan said that higher average selling price and transaction size will help retailers to offset lower in-store footfalls compared to pre-pandemic levels amid high inflation.

The rating agency expects large apparel retailers to grow faster at 25-30% this fiscal, compared with 10-15% by their small and mid-sized counterparts. This higher growth by large retailers is due to their lower base as most of the shops are located in malls and were impacted significantly by the pandemic-related lockdown.

The report is based on a study of 46 CRISIL-rated apparel retailers, which account for more than a third of the organised sector’s revenue of about Rs 90,000 crore.

Capital Expenditure

The capex of apparel retailers is set to rise over 30% year-on-year this fiscal because of the improvement in demand. The retailers plan to make investments towards more warehousing space, brand acquisitions, tech platforms and online offerings. The share of revenue from online channels compared to overall revenue of apparel retailers is expected to surpass 15% in 2023 as against about 5% in fiscal 2020, said the rating agency.

Meanwhile, improving revenue and profitability as well as higher cash from operations, will help apparel retailers to invest in increasing stores and online presence, which will gradually benefit their credit profiles. The apparel retailers managed their balance sheets well during the pandemic through timely equity raising, which helped mitigate the impact of volatility in business performance.

CRISIL Ratings’ Associate Director Shounak Chakravarty said the expected improvement in cash accrual will largely fund capex and strengthen the credit profiles of apparel retailers this fiscal.

Operating Margin

CRISIL Ratings said that the operating margin of apparel retailers will improve by 175-200 basis points (bps) year-on-year to 7.75-8%, helped by better economies of scale leading to better fixed-cost absorption, price hikes, and greater share of private labels.

The large retailers are expected to improve operating margins with about 250-300 bps expansion this fiscal, driven by stronger and well-established brands that command higher gross margins compared with mid-sized apparel retailers.

However, higher input prices will limit the retailers’ operating margin by 50-70 bps below the pre-pandemic level. For instance, domestic prices of cotton almost doubled between April 2020 and May 2022 that resulted in higher raw material cost.

“Debt metrics are seen comfortable with gearing below 0.5 time and interest coverage set to improve to over 10 times this fiscal, compared with about 6 times last fiscal,” said Chakravarty.

Besides, the rating agency noted that further waves of the pandemic, stringent lockdown and mobility restrictions, and higher-than-expected input cost inflation that could lead to downtrading and ultimately affect profitability would bear watching.