India Ratings and Research (Ind-Ra) recently assigned India’s apparel retail sector an improving outlook for fiscal 2021-22. After a complete washout in the first quarter of this fiscal (Q1 FY21) and the gradual store openings, rising footfalls and relaxations in the lockdown norms since then, the recovery in apparel segment has seen a quarter-on-quarter improvement with sales rebounding to near 80 percent of the pre-COVID levels during Q3 FY21.
The rating agency expects the recovery to continue in FY22 on back of improving consumer confidence, resumption of store expansion by organised players and prospects of the vaccine rollout.
Although the pressure on discretionary spending, possibility of a second wave of infection in certain states and subsequent travel restrictions continue to pose a threat to the recovery, improved cost structures, liquidity enhancement measures and omni-channel push should provide cushion to glide through the same.
Ind-Ra expects part of the cost rationalisation measures undertaken by retailers during the pandemic-led crisis to be sticky and sustain even after achieving business normalcy starting FY22, thereby structurally improving the margin profile of apparel retailers.
Store expansionary capex reduced sharply in the first half of this fiscal (H1 FY21) on the back of the lack of business visibility. However, it expects the pace of expansion to accelerate in FY22, as the organised segment continues to gain market share from the unorganised segment along with an improvement in the operating environment and resumption in store rollout from Q3 FY21, with particular focus on tier II+ cities.
While retailers have been pushing omni-channel offerings for the past few years, the pandemic has accelerated digital transformation, forcing retailers to think broadly and invest more rapidly in them.
Retailers will continue to allocate an important part of their capital expenditure to the development of omni-channel capabilities to widen their digital and customer interaction capabilities and thus complement the brick and mortar business.
Ind-Ra has maintained a ‘stable’ rating outlook on its apparel retail portfolio for FY22, led by strong brand recall, geographical diversified presence and healthy liquidity. With the survival phase following the pandemic now completed, the focus has shifted towards revival and growth.
Ind-Ra expects revenues to fall by 40-45 per cent year on year in FY21 and a recovery to FY20 levels in FY22 for apparel retail.
