Apparel Retail is Out of Fashion for Now, But Likely to Rebound in FY22: India Ratings

New Delhi: India Ratings and Research (Ind-Ra) expects companies in the apparel retail sector to weather the near-term demand volatility and sluggishness through effective liquidity management, while also improving their competitive advantage by increasing the operational efficiencies and controlling costs.

While the profitability will be affected in FY21, due to an expected 40%-45% decline in the revenues, companies have focused on cash preservation by taking a multi-pronged approach. They have undertaken additional borrowings to manage cash losses while deferring their capital expenditure and dividend payments to conserve liquidity. Ind-Ra expects a demand recovery from the second half of 3QFY21 during the festive season, assuming that COVID-19 related fears will subside.

However, the household income would continue to be under pressure throughout FY21. Given the growing presence and profitable portfolio of large retail players, Ind-Ra believes that robust sales growth in FY22 will lead to strengthening of the financial profile, closer to levels seen in FY19 and FY20.

Stable to Marginally Negative Rating Trajectory: The agency continues to monitor the recovery in sector revenues, and will take appropriate rating actions in case the rebound in sales is significantly below the agency’s expectations for the remainder of FY21. Ind-Ra will re-asses the revenue recovery and liquidity profile of the sector post 3QFY21.

Gradual Demand Recovery in 2HFY21: Ind-Ra expects the sector revenues to fall 40%-45% yoy in FY21. A continued country-wide lockdown beyond 2QFY21 or a prolonged impact of COVID-19 will lead to a further downward revision of revenue estimates. FY22 will see a sharp recovery year on year with a lower base effect and new store openings as the organised sector’s share continues to grow. In fact post COVID-19, the shift to organised from unorganised would accelerate, as small players would find it difficult to sustain operations, given lower footfalls, apprehension among customers related to store hygiene and sanitisation, and credit crunch, making the business unviable.

1QFY21: Revenues were below 20% of the pre-COVID levels. Players with exposure in value retail and to Tier 2 and Tier 3 cities were marginally placed than retailers primarily in metros, driven by more relaxations in lockdowns and down trading from lower consumer income levels.

2QFY21: The upward sales trend witnessed in June 2020 was slowed down by intermittent lockdowns across the country, and the pandemic spreading to non-metro cities as well. Despite about 80% of stores being open as of August 2020, the sector could only witness a slow-but-incremental recovery with the prevalence of social distancing norms to prevent the spread of virus, leading to reduced footfalls in stores, and prioritisation of spends towards essentials and low-ticket discretionary items amidst a squeeze on income levels. Ind-Ra expects sales of around 45% of the pre-COVID levels.

3QFY21: Ind-Ra expects a meaningful recovery, driven by the pent-up festive and wedding season demand, even as social distancing norms and slowing economy continue to be a drag. Overall, Ind-Ra expects sales to touch around 85% of the pre COVID-19 levels. Consumer behaviour patterns such as ‘revenge buying’ may play out and support revenues.

4QFY21: Ind-Ra expects pre-COVID-19 level demand to be achieved, with the impact of COVID-19 led demand erosion gradually declining, and economic recovery accelerating. The lower base effect from the COVID-19 impacted March 2020 would also support year-on-year quarterly revenues.