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% this fiscal, from our earlier expectation of 30-35%¹. And this revenue growth would be on a low base of last fiscal, which saw a decline 35-40%.

Slower recovery in revenue will mean operating margin of apparel retailers will remain moderate at 4-5% for this fiscal, compared with our earlier expectation of 7-8%.

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% of the pre-pandemic level² in May compared with 77% 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% of the pre-pandemic level (60% 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% this fiscal compared with pre pandemic level of 4-5%.

To clear inventory and attract footfalls, retailers may offer higher discounts, especially during initial months of reopening of stores, and this could impact profitability. However, renegotiation of rental arrangements and trimming of employee cost, which together account for 20% of revenue, will help keep operating margin at 4-5% this fiscal, a slight improvement over 3-4% last fiscal, but much below the pre-pandemic level of ~9%.

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%.

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.

¹ Pandemic to shave off over a third of apparel retailers' revenues
² Mobility observed during the 5 week period between 3 Jan – 6 Feb 2020
³ Interest coverage ratio: Earnings before interest, tax, depreciation and amortisation / Interest Cost; not adjusted for Ind-AS 116