ICRA, the leading credit rating agency, has released a report indicating that demand pressures and inflationary headwinds are expected to moderate the revenue growth of Indian fashion retail entities to 10 per cent in the fiscal year 2024.
The analysis covers 11 listed retail entities and highlights the challenges faced by the sector, including the impact on demand in the value-fashion segment.
Following an impressive 51 per cent year-on-year revenue growth in FY 2023, the fashion retail industry is anticipated to experience a slowdown in the current fiscal year due to inflationary pressures.
ICRA’s report suggests that revenue growth for the sample set of retail entities will moderate to 10 per cent in FY 2024. Additionally, operating profit margins (OPMs) are projected to decline by approximately 100 basis points to around 5.7 per cent, primarily due to the softening demand and continued high expenditure on advertising and promotion throughout the year. However, ICRA maintains a stable outlook on the retail sector.
Commenting on the trends, Ms. Sakshi Suneja, Vice President & Sector Head, – Corporate Ratings, ICRA, says, “The fashion retail sector has been facing demand slowdown due to inflationary pressures, especially post the last festive season. The slowdown has been more pronounced in the value fashion segment, where the average sales per sq.ft. still remain lower than pre-pandemic levels and have been witnessing a Q-o-Q decline since Q3 FY 2023. The premium segment, after having remained resilient till December 2023, also started showing signs of demand slowdown in Q4 FY 2023, with its average sales per sq. ft remaining below the pre-Covid levels. Demand pressures are expected to persist till H1 FY 2024, with the sector expected to show improvement only with the onset of the festive season. This, coupled with regular network expansion, will translate into an estimated 10 per cent revenue growth for FY 2024.”
Despite robust revenue growth in FY 2023 driven by network expansion, the OPMs remained 100 basis points below pre-pandemic levels. This was primarily due to the demand slowdown and a significant increase in advertising and promotion expenses undertaken by retailers to compensate for the sales decline in FY 2021 and FY 2022. Many large retailers have also acquired or launched brands in new categories, particularly in the ethnic wear segment, resulting in substantial investments. As of now, retailers have not indicated any reduction in ad spending for the coming quarters, as they anticipate a demand recovery in the second half of FY 2024. ICRA also expects discounting levels to rise in H1 FY 2024 as retailers aim to boost sales, which may exert pressure on gross margins.
After limited retail space additions in FY 2021, retailers resumed their store expansion plans in FY 2022 and FY 2023, adding approximately 5.2 million square feet of space (a 30 per cent increase over the retail space as of March 2021). The total capital expenditure (capex) outlay on store additions by entities in ICRA’s sample set increased by 60 per cent year-on-year to Rs. 1,460 crore in FY 2023, despite a slowdown in the value fashion segment. No significant reduction in capex has been announced by retailers so far, considering the expected demand revival and favorable long-term prospects of the Indian retail industry. Consequently, capex outlay towards store additions is expected to increase by 10 per cent in FY 2024 to Rs. 1,600 crore.
Ms. Suneja elaborated on this, stating, “Following the pandemic, retailers have shifted their focus toward expansion through offline channels. Sales through online channels, which were previously anticipated to grow at a faster pace, have now slowed down.
