Credit rating agency ICRA has upgraded retail sector outlook to stable from negative; and said the sector likely to witness 12-13% YoY revenue growth in FY2023, with a YoY increase in operating profit margins by 150 bps to 8.2%.
The level of discounting by the retail industry remained low during FY2021 and FY2022 (compared to FY2020) as retailers attempted to protect their gross margins against the backdrop of reduced sales.
“Driven by pent-up demand, improving vaccination coverage and a pick-up in economic activity, the retail sector reported a healthy recovery in sales, post the second COVID-19 wave. While the operations were temporarily affected by the third wave in January and February 2022, the sector bounced back swiftly in March 2022,” said Sakshi Suneja, Vice President & Sector Head, ICRA.
According to ICRA, revenues expected to surpass FY2020 pre-Covid levels by 5-6% in FY2023 as it recovered up to 90% of pre-Covid levels in FY2022.
According to ICRA’s analysis on the industry, retail firms in its sample set will see operational profit margins (OPMs), driven by the advantages of operating leverage.
“Consequently, sales recovered to up to 90% of pre-Covid levels in FY2022. With the footfalls breaching the pre-pandemic levels in Q1 FY2023, retail entities in ICRA’s sample set are expected to witness a 5-6% revenue growth in FY2023 vis-à-vis the pre-Covid period of FY2020,” said Suneja.
With footfalls and revenues surpassing the pre-pandemic levels in FY2023, ICRA expects the level of discounting to go up as retailers compete to grab a higher share of the consumer’s wallet. Besides material costs, rental, employee costs, and selling/promotional expenses are the other key cost heads of a retail entity, typically accounting for 29–30% of its total cost.
“Notwithstanding the near-term challenges in terms of inflationary pressures, positives in the form of favourable demographics, rising disposable incomes, and low penetration of organised retail, augur well for the prospects of the industry over the medium term,” Suneja added.
After the strict cost rationalisation seen in FY2021, retailers largely rolled back the cuts on employee expenses and advertising expenses in FY2022. Retailers undertook rental negotiations in FY2022, following the sporadic restrictions on mobility.
However, the extent of concessions received was markedly lower vis-à-vis FY2021. While these costs will rise further in FY2023, the OPM will expand as a result of healthy revenue growth and the benefits of economies of scale.
In FY2021, the majority of the large, listed companies raised equity to fund losses, deleverage their balance sheets, and improve liquidity. Consequently, despite lower-than-pre-Covid revenues and profits in FY2021, the retailers ended March 2021 with a much stronger balance sheet (vis-à-vis March 2020).
Retailers, thus, resumed their store expansion plans in FY2022, following the lull period of FY2021, with entities in ICRA’s sample set doubling their capital expenditure (capex) spending towards store additions in FY2022 (compared to FY2021).
Driven by a buoyant demand outlook and recovery in footfalls, retailers are expected to continue with their store expansion plans in FY2023. Entities in our sample set are expected to increase their capital spending by over 45% in FY2023, with store additions largely targeted towards Tier-II/III towns.
“The retailers will also continue focusing on expanding their omni-channel presence, with the share of online sales going up to 12-14% of revenues by FY2024, vis-à-vis 8% in FY2022. However, it is unlikely to replace the brick-and- mortar sales model any time soon,” said Priyesh Ruparelia, Vice President and Co-Group Head.
“Notwithstanding the large capex plans, the credit profile of large, listed entities is expected to remain adequately supported by strong balance sheets, as evinced by healthy liquidity (Rs. 2,800 crore of cash and liquid investment balances vis-a-vis total debt of Rs. 2,300 crore as on March 31, 2022). Their debt coverage indicators will be supported by this, coupled with improved cash flows in FY2023. The total debt-to-operating profit is expected to improve to below 1 time for entities in our sample set as of March 2023, vis-à-vis 1.4 times as of March 2022,” said Ruparelia.
“With the world’s population growing about 1.0% annually, our outlook implies solid gains in real per capita GDP and thus avoidance of a global recession,” said Sara Johnson, Executive Director, Economic Research, S&P Global Market Intelligence.