India Ratings and Research (Ind-Ra) has assigned the apparel retail sector an improving outlook for FY22. After a complete washout in 1QFY21, 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% of the pre-covid levels during 3QFY21. Ind-Ra 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 omnichannel 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 1HFY21 on the back of the lack of business visibility. However, Ind-Ra 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 3QFY21, with particular focus on Tier II+ cities.
While retailers have been pushing omnichannel 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 capex to the development of omnichannel capabilities to widen their digital and customer interaction capabilities and thus complement the brick and mortar business.
Rating Outlook – Stable
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. However, 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 its expectations.
Revenues and Credit Metrics to Rebound in FY22
Ind-Ra expects revenues to fall 40%-45% yoy in FY21 and a recovery to FY20 levels in FY22 for apparel retail. Network expansion has resumed and focus on under-penetrated areas, particularly Tier II+ cites, would drive revenue growth in the medium term. Expansion plans in FY21 were primarily funded through cash accruals, limited working capital debt, and equity infusions. Ind-Ra expects the net leverage of its rated portfolio to improve to 1.0x in FY22, after significantly deteriorating in FY21 (FY20: 1.6x) when the focus was on maintaining liquidity buffers. The liquidity indicator of all the rated entities is adequate, led by the availability of cash, unused lines, and in certain cases backed by equity infusions from strong promoter groups.