The level of retail industry rebates remained low in fiscal 2021 and 2022 (compared to fiscal 2020) as retailers attempted to protect their gross margins amid declining sales.
“Driven by pent-up demand, improving vaccination coverage and a pick-up in economic activity, the retail sector saw a healthy recovery in sales, following the second wave of COVID-19. While operations were temporarily affected by the third wave in January and February 2022, the sector rebounded rapidly in March 2022,” said Sakshi Suneja, Vice President and Sector Head, ICRA.
Revenues are expected to exceed pre-Covid FY2020 levels by 5-6% in FY2023, according to ICRA, as they have recovered up to 90% of pre-Covid levels in FY2020. fiscal year 2022.
According to ICRA’s analysis of the sector, the retail companies in its sample will see operating profit margins (OPMs), driven by the benefits of operating leverage.
“As a result, sales recovered to up to 90% of pre-Covid levels in fiscal year 2022. With footfall exceeding pre-pandemic levels in the first quarter of fiscal year 2023, retail entities of the CIFAR sample are expected to experience revenue growth of 5-6% in FY2023 compared to the pre-Covid period in FY2020,” Suneja said.
With footfall and revenue surpassing pre-pandemic levels in FY2023, CIFAR expects the level of discount to increase as retailers compete for a larger share of the consumer’s wallet. Apart from material costs, rental, personnel costs, and sales/promotional expenses are the other major cost items 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 favorable demographics, rising disposable incomes and low penetration of organized retail bode well for the outlook for the economy. medium-term industry,” added Suneja.
After the strict cost rationalization seen in fiscal year 2021, retailers largely reversed reductions in employee spending and advertising spending in fiscal year 2022. Retailers entered lease negotiations in fiscal year 2021. fiscal year 2022, following sporadic mobility restrictions.
However, the extent of concessions received was significantly lower compared to FY2021. Although these costs will increase further in FY2023, the OPM will grow through healthy revenue growth and savings benefits. of scale.
In fiscal 2021, the majority of large listed companies raised equity to finance losses, deleverage their balance sheets and improve liquidity. Therefore, despite having lower revenues and profits than before Covid in fiscal 2021, retailers ended March 2021 with a much stronger balance sheet (compared to March 2020).
Retailers therefore resumed store expansion plans in FY2022, following the lull in FY2021, with entities in the ICRA sample doubling their capital expenditures (capex) for store additions in fiscal 2022 (compared to fiscal 2021).
Driven by a buoyant demand outlook and a recovery in footfall, retailers are expected to continue their store expansion plans in fiscal 2023. Entities in our sample are expected to increase capital spending by more than 45% in in FY2023, with store additions largely targeted at Tier II/III cities.
“Retailers will also continue to focus on expanding their omnichannel presence, with the share of online sales growing to 12-14% of revenue by FY24, from 8% in FY22. However, it is unlikely to replace the physical retail model anytime soon,” said Priyesh Ruparelia, Vice President and Group Co-Head.
“Large investment plans notwithstanding, the credit profile of large listed entities should remain sufficiently supported by strong balance sheets as evidenced by healthy liquidity (Rs. 2,800 crore in cash and liquid investment balances compared to total debt of Rs. 2,300 crore as of March 31, 2022. Their debt coverage metrics will be supported by this, coupled with improved cash flow in fiscal 2023. The debt to operating profit ratio total is expected to improve to less than 1x for entities in our sample in March 2023 from 1.4x in March 2022,” Ruparelia said.
