Covid impact: Domestic retailers to see 40% revenue fall, predicts Icra

Indian apparel exporters are likely to see a decline of 20-25% in their turnover in 2020-21, while those focused on domestic market are expected to witness a 30-40% decline in revenue due to Covid-19

Indian apparel exporters are likely to see a decline of 20-25 per cent in their turnover in 2020-21, while those focused on domestic market are expected to witness a 30-40 per cent decline in revenue due to the COVID-19 pandemic, rating agency Icra said.

Indian apparel players are banking on the upcoming festive season to recover meaningfully from their all-time low sales, Icra said in a report.

Icra projects the Indian apparel exporters to report a turnover decline of 20-25 per cent in FY21, compared to a steeper 30-40 per cent decline in revenues of companies focused on the domestic market, the report said.

This follows a much steeper decline witnessed by apparel companies in April-September FY21, it added.

However, apparel exporters have already witnessed an encouraging build-up in their order book position amid expectations of a spike in festive season sales in international markets.

"Although concerns on the second wave of the pandemic are gathering pace across countries and this remains a key business risk, the recovery trajectory so far has been relatively better for the apparel exporters," Icra Ratings Senior VP and Group Head Jayanta Roy said.

Following the initial cancellations of order offtake by some of the international buyers during March to May, the faster opening up of economies and the resultant better recovery in retail sales in international markets facilitated a relatively higher uptick in sales for apparel exporters in the subsequent months, he added.

For apparel exporters, diversification across customers or geographies and extent of performance pressures on key customers have been the key determinants for COVID-19 impact.

For domestic retailers, the impact depended on factors such as strength of online presence, segments being catered to and the presence in tier II and III cities and rural markets, which have performed better than metros and tier I cities, it said.

Increased downtrading has been witnessed in domestic market amid pressures on discretionary consumer spending, which, together with a faster sale recovery in tier II and III cities and rural markets, benefitted the brands catering to mass or value segments, it said.

However, pent-up demand as well as expectations of healthy festive buying augur well for demand in the domestic market in the third quarter of FY21.

"Demand in H2 FY21 is expected to gather support from extended online festive sales and further relaxations under Unlock 5.0 guidelines, effective from October 15 onwards," Roy said.

"This apart, developments such as a rollback of the previously announced pay cuts by some corporate entities, the government's festive advance scheme among others are also expected to result in improved cash flows in the hands of consumers, thereby supporting discretionary spending,"he added.

The contraction in revenue projected for FY2021 is likely to translate into at least 150-200 basis points (bps) correction in the operating profitability of apparel exporters in the current fiscal.

For domestic apparel retailers, the decline is estimated to be much steeper, at a minimum of 600 bps, as these companies have relatively higher fixed costs like employee costs and rental expenses, Icra said.

The impact on profitability is likely to be somewhat cushioned by cost rationalisation initiatives being undertaken by companies, including renegotiation of rental agreements and transition to revenue-share arrangements, employee-base optimisation, salary cuts, it said.

Amid the shrinkage of profit margins and stretched operating cycles, dependence on debt during the year is expected to remain high and coverage metrics for the year are likely to weaken for apparel companies, more so for domestic apparel retailers, it added.