The industry is facing a problem like we have not seen in the last 20 years. Demand is expected to return to only during the October-December festive season. According to a report released on Friday, store closures due to the coronavirus epidemic, social distancing, and lack of demand may result in a 30-35% reduction in revenue.
Credit rating agency Crisil said the sector’s revenue will drop to less than a third when it reaches 1.7 billion. Thus, operating profit is expected to be affected by 200 basis points, but the steady decline in operating profit will increase sharply, mainly in order to meet the cash flow deficit, which requires additional funds from the lender. This also affects credit metrics.
According to a sample analysis of 60 Crisil-rated April retailers representing one-third of sales in this sector, demand is expected to return only at the festive season from October to December.
In the apparel sector, department store-type sales, which account for a third of the sample set’s revenue, will be cut by nearly 40%, which will be devastating. Half of these department stores are mainly in shopping malls and metropolitan cities.
Fashion retailers, which account for two-thirds of the industry, are affected by 30%, as they have greater impact in smaller towns. However, the above vendors are likely to make more contributions in consumer online channels this fiscal year by changing consumer buying patterns according to the epidemic.
Gautam Shahi, director of Crisil Ratings, said, “To increase footfalls, retailers may have to offer discounts while also incurring higher costs to ensure adherence to social distancing. On the other hand, we also expect retailers to convert a portion of fixed lease rentals to variable, in addition to pruning employee costs, and other discretionary spends. Considering these aspects, operating profitability will moderate by up to 200 bps this fiscal, from about 7-8% in fiscal 2020.”
According to Crisil, it is important to change the revenue from stable to fluctuating. Otherwise, the marginal effect is serious. Rental and employee expenses typically account for 20% of the total gross retail income, and most of these expenses are essentially fixed.
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