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Covid second wave to fray apparel retail growth, profitability
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SME Times News Bureau | 05 Jul, 2021
Temporary store closures, restricted mobility, and curtailed
discretionary spending because of the second wave of Covid-19 infections
are set to pull down revenue growth of the organised apparel retail
sector to 15-20 per cent this fiscal, from an earlier expectation of
30-35 per cent, a report by CRISIL has said.
According to the
ratings agency, the expectation of lower revenue growth this fiscal
would be on a low base of last fiscal, which saw a decline of 35-40 per
cent.
Slower recovery in revenue will mean the operating margin
of apparel retailers will remain moderate at 4-5 per cent for this
fiscal, compared with the earlier expectation of 7-8 per cent.
Retailers
may have to take recourse to additional debt to plug near-term
cash-flow mismatches, which could impact their credit quality. That
said, CRISIL-rated apparel retailers are expected to be better placed
due to strengthened balance sheets, supported by equity raise of Rs
2,000 crore made last fiscal.
This is based on an analysis of 60
Crisil-rated apparel retailers, which account for a third of the sector
revenue. It assumes staggered easing of localised restrictions and
reopening of stores, leading to demand recovery from the second quarter
of this fiscal, as the impact of the second wave abates and the
vaccination drive gathers pace.
Localised restrictions starting
from the second half of April this year resulted in pan-India average
retail mobility (footfalls to retail stores) falling sharply to 36 per
cent of the pre-pandemic level in May compared with 77 per cent in
February. Temporary store closures and constrained mobility have sharply
impacted sales of apparel retailers in the first two months of this
fiscal, though reopening from June is likely to ignite a gradual
recovery.
Says Anuj Sethi, Senior Director, CRISIL Ratings,
"Revenue this fiscal will only be 70-75 per cent of the pre- pandemic
level (60 per cent in fiscal 2021). Moreover, unlike the first wave that
had higher impact in Tier-1 cities, the second wave has spread in
Tier-2 and 3 cities and rural areas as well, resulting in a similar
impact on departmental and value fashion retailers."
Amid this
sharp impact on offline sales, acceleration in online shopping has been a
saving grace and bodes well for retailers with omni-channel presence.
The share of e-retail sales will likely rise to 8-9 per cent this fiscal
compared with the pre-pandemic level of 4-5 per cent.
To
clear inventory and attract footfalls, retailers may offer higher
discounts, especially during the initial months of the reopening of
stores, and this could impact profitability. However, renegotiation of
rental arrangements and trimming of employee cost, which together
account for 20 per cent of revenue, will help keep the operating margin
at 4-5% this fiscal, a slight improvement over 3-4 per cent last fiscal,
but much below the pre-pandemic level of 9 per cent.
Last
fiscal, retailers strengthened their balance sheets through equity
infusions of Rs 2,000 crore, which reduced overall debt for CRISIL-rated
apparel retailers by 30 per cent.
Says Gautam Shahi, Director,
CRISIL Ratings, "Having learnt their lessons from the first wave,
apparel retailers are better prepared to manage working capital this
fiscal. A gradual pace of store addition, coupled with retained proceeds
of the equity raise made last fiscal, will help support liquidity.
Supported by better performance, interest coverage3 ratio is likely to
improve to 3-3.5 times this fiscal, from 2 times last fiscal, but remain
below the pre-pandemic level of 5 times."
Nevertheless, some
players with weak balance sheets and modest credit quality may require
additional debt to plug cash-flow mismatches in the first half of this
fiscal.
Going forward, the spread of infections, ability to
renegotiate rentals, and rebound in discretionary demand will be the key
monitorables.
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