The organised retail apparel sector is expected to clock a revenue growth of 8-10 per cent this fiscal, stated a report by CRISIL Ratings. The growth, it added, will be driven by higher demand stemming from a normal monsoon, easing inflation, festive and wedding season and increasing preference for fast fashion.
Though akin to last fiscal, revenue growth will be slower than the compound annual growth rate of 11-12 per cent seen between fiscals 2018 and 2023, due to which retailers had become cautious for opening new stores. Instead, retailers, CRISIL said, will focus on enhancing efficiencies at existing stores, controlling costs and limiting reliance on external debt, which will help maintain their operating margin at 7.2-7.4 per cent despite continued high marketing expenses, thereby ensuring stable credit profiles.
CRISIL Ratings analysed 37 organised apparel retailers, accounting for over a third of the organised industry, to release the findings.
‘Those filled with hate’: PM Modi accuses opposition of divisive politics amid controversy over Rahul Gandhi’s US speech
Nagpur-Secunderabad Vande Bharat Express: Enhancing connectivity and boosting regional development- Details inside
New GST return filing rules to help streamline process, increase transparency, better traceability by govt, say experts
NPS Calculator: Starting at 25? Here’s how much you need to invest for Rs 1.5 lakh pension post retirement?
In terms of segments in the apparel retail business, the report maintained that the mass market is the largest segment followed by premium and luxury. Fast fashion, a growing subset of the mass market, offers the latest trends, frequently updated throughout the season with a shorter lead time to reach customers quickly.
Anuj Sethi, Senior Director, CRISIL Ratings Ltd, said, “The mass market segment accounts for ~60 per cent of total sales now, compared with ~56 per cent before the pandemic, due to the rising popularity of fast fashion, which is expected to be the primary revenue driver this fiscal. The likely increase in demand for premium clothing during the upcoming festive and wedding seasons will also contribute to overall revenue growth of 8-10 per cent this fiscal.”
In order to meet the evolving consumer behaviour, retailers are adjusting business strategies, enhancing supply chain efficiency and focusing on new trends, particularly in fast fashion.
Another reason why retailers will remain cautious at store expansion in urban locations is the consumer spending shifting towards travel experiences and luxury goods, while store expansion will continue in tier-2 and 3 cities, which are transitioning towards organised retail. That said, area addition will be lower on-year at around 2.2 million square feet compared with approximately 3.6 million square feet last fiscal as store sizes will be smaller, CRISIL said.
The report also said that the revenue density is expected to remain flat at around Rs 11,900 per square foot due to muted growth in same-store sales and will restrict significant improvement in profitability.
Anil More, Associate Director, CRISIL Ratings Ltd, said, “The marginal increase in profitability this fiscal will be driven by apparel retailers streamlining existing stores and opening new stores only as necessary, given that demand has not fully recovered. Besides, the need to offer higher discounts and incur marketing spends to attract customers will limit the overall improvement in operating margin to 7.2-7.4 per cent against ~7.0 per cent in fiscal 2024.”
Better inventory management and stable input costs will prevent significant inventory write-offs, unlike last fiscal when sharp cost changes lowered profitability by 100-110 basis points.
Per CRISIL, consistent cash flow and limited reliance on debt to fund store expansion will lead to adequate debt metrics. Interest coverage and total debt/Ebitda ratios of apparel retailers rated by CRISIL Ratings are expected to be around 6.2 times and 1.7 times, respectively, in fiscal 2025, in line with last fiscal.
In terms of key monitorables, changes in commodity prices, inflation trends, consumer spending behaviour, and retailers’ ability to sustain the momentum in the fast fashion segment will bear watching, CRISIL said.
From: financialexpress
Financial News
