Upgrading the retail sector’s outlook from negative to stable, credit rating agency ICRA projects a 13 per cent revenue growth for the sector in FY2023, with operating profit margins rising by 150 bps to 8.2 per cent Y-o-Y.
Retailers curb discounts as costs increase
Reduced sales compelled retailers to curb discounts during FY2021 and FY2022 as they attempted to protect gross margins. Improved vaccinations and resurgence in economic activities boosted sales recovery post second COVID-19 wave. Sales bounced back swiftly after being impacted by the third wave in January and February 2022, says Sakshi Suneja, Vice President & Sector Head, ICRA. ICRA projects, retailers’ revenues will surpass FY2020 pre-COVID levels by 5-6 per cent in FY2023 as they have recovered almost 90 per cent of pre-COVID levels in FY2022.
Store recovery driven by demographics, rising incomes
Revenues of retail entities analyzed by ICRA will grow 6 per cent in FY2023 as footfalls at stores have surged grown past the pre-pandemic levels in Q1 FY2023, adds Suneja. This will lead to a rise in discounting levels as retailers will compete to grab a higher share of consumers’ spending.
The industry’s prospects will be boosted by favorable demographics, rising disposable incomes, and low penetration of organized retail. In FY2022, most retailers deferred cuts in employee and advertising expenses. They undertook new rental negotiations during the year though the concessions offered to them were lower than 2021.
Expenses on advertisements, employees to surge
Expenditure on advertisements and employees is expected to increase in FY2023. This will boost retailer’s operational profit margins leading to healthy revenue growth. Most large listed companies raised funds in FY2021 to deleverage their balance sheets and boost liquidity. This strengthened their balance sheets despite lower-than-pre-COVID revenues and profits in FY2021.
Retailers also embarked on store expansion plans in FY2022, with companies surveyed by ICRA doubling their investments in new store additions in FY2022 compared to FY2021.
Store additions to increase 45%
Retailers will continue to expand stores in FY23, says the ICRA report. Most companies surveyed will boost investments in new store additions by 45 per cent. Most stores will open in Tier II-III towns. The share of online sales will increase to almost 14 per cent of revenues by 2024 from 8 per cent in 2022. However, they would not replace brick-and mortar sales, says Priyesh Ruparelia, Vice President and Co-Group Head.
Large, listed entities will be adequately supported by strong balance sheets, as indicated by liquidity infusion in them. Their debt coverage indicators will be supported by improved cash flows in FY2023 while debt-to-operating profit will improve to below 1 times as against 1.4 times as of March 2022, adds Ruparelia.