Fashion retailers likely to witness 35 to 42 pc dip in FY21 revenues: ICRA

The value and lifestyle fashion retailers are likely to witness 35 to 42 per cent decline in revenues during the current financial year, according to investment information firm ICRA.

The value and lifestyle fashion retailers are likely to witness a 35 to 42 percent decline in revenues during the current financial year, according to investment information firm ICRA. Revenues in Q2 FY21 through improved sequentially are expected to remain substantially lower on a year-on-year basis adversely impacted by local lockdowns and restrictions, it said in its latest credit outlook for the sector.

A meaningful ramp up in sales is expected from Q3 FY21 onwards led by increased demand during the festive season and the substantial easing of restrictions under the new unlock guidelines with effect from September 1. While retail entities have embarked on stringent cost rationalization drives, given the expected pronounced revenue decline and changing consumption patterns (with increased demand for casual wear), the operating margin is expected to weaken by 300 to 500 basis points in FY21.

Additionally, with the gradual uptick in demand and re-opening of stores, the quantum of rental savings due to renegotiations will reduce. ICRA expects the credit metrics of the value and lifestyle fashion retailers to weaken materially this fiscal. The industry also remains exposed to the risk of inventory write-offs, given the overall slowdown in demand, especially for the formal wear segment.

The pandemic has highlighted the importance of having an omnichannel presence. Greater investments towards improving the integration of brick-and-mortar stores with online channels are expected as retailers attempt to attract the new millennial customer base and also counter the increasing competition from pure-play e-commerce players. Amid the pandemic, the value and lifestyle fashion retailers have deferred around Rs 1,970 crore worth of capital expenditure (CAPEX) spends towards store additions in the current year.

Nonetheless, given the under-penetration of organized retail in India, offline channels are expected to remain the preferred mode of expansion and the entities are expected to resume their Capex plans towards store additions, once the situation normalizes. On the other hand, ICRA expects the food and grocery retailers to report a 3.7 percent growth in revenues during FY21.

Aided by a significant easing of lockdown restrictions (facilitating sales of non-food categories) as well as the onset of the festive season, revenue growth is expected to revert to the positive trajectory from H2 FY21 onwards. The share of non-food categories in the overall revenue mix is, however, expected to remain lower and constrained by the slowdown in discretionary spending.

While this will weaken gross margins, given that more than 70 percent of the revenues of these players are accounted for by the sale of food and staple items, ICRA does not expect any material weakening in the credit metrics of food and grocery retailers. The credit outlook is thus stable. Store additions which remained muted in Q1 are expected to pick up from Q3 onwards following the easing of restrictions as well as pick up of construction activities post the monsoon season.

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