Apparel retailers' FY21 revenue may fall 30 pc on store closures, low demand due to COVID-19: Report
Store closures, social distancing, and lack of demand due to the coronavirus pandemic may cause a 30 percent dent to revenues of the Rs 1.7 lakh crore organised apparel retailers in the current financial year, a report said on Friday.
Bottomlines (profits) of such companies will also be impacted as the operating profitability is likely to go down by two percent, the report by ratings agency Crisil said adding that companies will be forced to pile up debt as a result of this.
The country has been put under a lockdown since March 25 to arrest the COVID-19 infection spread, which is yet to be fully lifted. The lockdown has chilled all economic activities and severely affected demand situation in the country.
"Revenue of the Rs 1.7 lakh crore organised apparel retail sector is set to plummet 30-35 percent this fiscal because of temporary store closures, restricted mobility and low-income visibility for consumers," it said.
Shortfall in profits will force the companies to pile up on debt and will affect their credit metrics, it warned.
The analysis is based on a sample of 60 rated apparel retailers that represent a third of the sector's revenue, and considers a staggered easing of the lockdown, and majority of stores reopening in June, it said.
However, demand is expected to recover to pre-lockdown levels only during the October-December festive season, it added.
Sale of the departmental store format, which is one-third of revenues of sample set, will be hit harder, with a 40 percent decline in revenue, as half of these departmental stores are mainly located in malls and Tier-1 cities, it said.
For value fashion retailers, which represent two-thirds of revenues of sample set, the revenue impact will be lower at 30 percent, as these have higher presence in Tier-2 and 3 cities.
"To increase footfalls, retailers may have to offer discounts while also incurring higher costs to ensure adherence to social distancing. On the other hand, we also expect retailers to convert a portion of fixed lease rentals to variable, in addition to pruning employee cost, and other discretionary spends," its director Gautam Shahi said.
He said this will lead to a two percent moderation in the operating profit levels from the 7-8 percent witnessed in 2019-20.
Converting lease rentals from fixed to variable is critical for the industry as the margin impact will be severe otherwise, it said adding that lease rentals and employee costs constitute 20 percent of the overall revenues of the apparel retailers and large proportion of these costs is fixed in nature.
"Weakened business levels and lower profitability will lead to a moderation in debt metrics; for instance, the interest coverage ratio that stood at over five times in past two fiscals is expected to weaken to just over three times this fiscal," Ankit Hakhu, another director, said.