According to a recent report by Crisil Ratings, brick-and-mortar apparel retailers in the organized sector are projected to experience a revenue growth of 7-8 percent this fiscal year. This growth is anticipated to be driven by increased demand during the festival and marriage seasons, despite the impact of inflation on discretionary spending during the initial quarter. The report highlights that ongoing expansion of stores, particularly into tier-II and III cities, will contribute to revenue growth in the current fiscal year as well as in the medium term.
The report indicated that although there has been a moderation in topline growth, the expected revenue growth will be on par with the 8 percent range observed prior to the pandemic.
Last fiscal, retailers witnessed a substantial 38 percent growth, stemming from a low starting point. This remarkable upswing was attributed to a swift recovery from the pandemic-induced economic downturn and higher profitability resulting from a sharp increase in raw material prices.
The report predicts that operating margins for this fiscal year are expected to reach 8 percent. This positive outlook is driven by a more favorable product mix, with a focus on the premium segment, as well as reduced input costs, which are anticipated to counterbalance the effect of increased marketing expenditures.
According to the report, the rate of expansion in store area will return to the pre-pandemic level of 2.2 million square feet in FY24, contrasting with the last fiscal’s 3.7 million square feet.
The Crisil report is founded on an examination of 39 organized apparel retailers, collectively representing a quarter of the INR 1.9 lakh crore revenue generated in the previous fiscal year.
According to Anuj Sethi, a senior director at the agency, demand in the premium segment is rising gradually with consumers increasingly preferring branded garments, driven by return to office and buoyant corporate activity.
This is helping offset muted-to-low demand from the economy and value segments, which account for 60 per cent of the revenue, because of changes in discretionary spends, he said.
With continuous store expansion, and the onset of the festive and wedding seasons, demand should improve in the third quarter, which normally fetches around 35 per cent of the annual revenue.
Operating margin is seen at previous year’s level of 8 per cent, despite significant reduction in prices of cotton, the key raw material, as per the report.
While store expansion in metros and tier-I cities will continue, retailers are also expanding to small towns, which will be relatively smaller-sized outlets.
Hence, the pace of area addition will normalise to pre-pandemic levels this fiscal. That, coupled with continuing investments to augment technology platforms and omni-channel infrastructure, will keep annual capex flat at last fiscal’s INR 2,000 crore.