Indian retail entities are all set to see an exuberant year-on-year (YoY) increase in sales of 45 per cent in financial year (FY) 2023 and their operating profit margins (OPMs) are expected to remain range-bound at 7-7.3 per cent, said rating agency ICRA.
The rating agency's recent analysis of the industry stated that this is due to significant increases in advertisement and promotion spending during the year. The rating agency currently has a stable outlook on the retail sector, it added.
"Driven by improved economic activity and an uptick in discretionary spending, the retail sector reported a robust 55 per cent YoY revenue growth in 9M FY2023. While this was admittedly partly led by a low base, it also reflects a sharp 35 per cent growth over the pre-pandemic period of 9M FY2020," said Sakshi Suneja, Vice President and Sector Head, Corporate Ratings, ICRA.
Suneja added that this favourable performance was also aided by nearly 5 million sq. ft of additional storage space set up during FY2020-FY2022. Segment-wise, the revenue growth is led by premium brands in the metros and tier-I cities.
She explained, "The value-fashion segment, on the other hand, is facing inflationary headwinds and reported a negative same-store-sales growth when compared with the pre-covid period of 9M FY2020."
While the 55 per cent revenue expansion achieved in 9M FY2023 factored in the seasonally strong Q3, the same is likely to sequentially moderate in Q4, translating to the projected 45 per cent YoY revenue growth for FY2023 as a whole.
The gross margins for the retailers in 9M FY2023 remained largely in line with the FY2022 levels, as the retailers passed on increased raw material costs (led by the increase in cotton prices) to end-consumers, it added.
The other key cost heads for a retailer include rental, employee costs, and selling/promotional expenses, which together account for about 30% of the total cost.
During FY2023, while rental expenses reverted to pre-pandemic levels, advertising and promotion expenses witnessed a steep increase, as retailers resumed these spending after a hiatus of nearly two years.
Following a lull in FY2021, retailers resumed their store expansion plans in FY2022, which have continued in FY2023 as well. This was also enabled by the large equity raisings in FY2021, coupled with improved cash flows during FY2022 and YTD FY2023.
Suneja added, “Entities in our sample set increased their capital spending to Rs. 14 billion in FY2023, implying a YoY expansion of 55 per cent. Online sales also continue to grow, though at a slower pace, with the waning impact of the pandemic. ICRA expects the share of online sales to inch up to 12-14% of revenues by FY2024/25."