India’s organized apparel market is prepared for a better business result in FY22 as enhancement in consumer confidence, pickup in store expansion and prospects of wider vaccine rollout help the segment rebound.
Rejuvenation in apparel segment has seen quarter-on-quarter enhancement with sales returning to near 80% of the pre-covid levels during 3QFY21, India Ratings and Research (Ind-Ra) said in an apparel retail outlook note released on Wednesday.
Apparel retailers are likely to close the current fiscal with a 40-45% dip in business. However, they are ready to reach FY20 recovery levels in FY22, the agency stated.
“India Ratings and Research (Ind-Ra) has assigned the apparel retail sector an improving outlook for FY22. After a complete washout in 1QFY21, and the gradual store openings, rising footfalls and relaxations in the lockdown norms since then, the recovery in apparel segment has seen quarter-on-quarter improvement with sales rebounding to near 80% of the pre-covid levels during 3QFY21. Ind-Ra expects the recovery to continue in FY22, on back of improving consumer confidence, resumption of store expansion by organised players and prospects of the vaccine rollout," Prasad Patil, analyst at Ind-Ra said in a research note.
The agency factored concerns around pressure on discretionary spending and threat of a second wave of infections that could obstruct recovery.
“The recovery rates consider the regional
lockdowns, the night curfews or weekend lockdowns in certain states. We do not anticipate nationwide lockdown of the same intensity as implemented during April-May 2020. Recent spike in covid positive cases may not impact recovery rates significantly, whereas recovery rates assumed as reasonably conservative. We are back to pre-covid levels largely on all retail segments," Patil said.
The ratings agency remains optimistic on improved cost structures, liquidity enhancement measures and omni-channel push by key retailers. Amusingly, analysts at Ind-Ra expect cost rationalization measures undertaken by retailers during last year’s crisis to sustain even after business returns to normal in FY22. This will help “structurally improve the margin profile of apparel retailers", the report added.
The lockdown and the subsequent shift in consumer habits encouraged apparel retailers to slash their inventory forecast, up their presence online and switch to more comfort wear as demand for formal and occasion wear remained muted. While apparel retailers struggled, for food and grocery and electronics retailers, business has fared much better.
Following store expansion capex was compact sharply in the first half of the current fiscal, Ind-Ra expects the pace of expansion for clothing retailers to accelerate in FY22.
As per previous report that large, organized players are now selecting on expansion—as they expect to gain market share from unorganized players along with an improved operating environment. The pandemic-led lockdowns also wiped-out smaller players from the market, giving larger players room to grow.
“Network expansion has resumed and focus on under-penetrated areas, particularly Tier II+ cites, would drive revenue growth in the medium term. Expansion plans in FY21 were primarily funded through cash accruals, limited working capital debt, and equity infusions," Patil said.
For the time being, retailers are also deepening their presence online. Benetton India is set to roll out its e-commerce portal, while Trent Ltd’s chain of Westside stores carved out an online portal late last year. Landmark Group-owned Lifestyle Ltd revamped its own website last year, while retailers such as Puma are targeting a significant share of sales from fashion centric marketplaces such as Myntra.
"Retailers will continue to allocate an important part of their capex to the development of omni-channel capabilities to widen their digital and customer interaction capabilities and thus complement the brick-and-mortar business," the report added.
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