Indian fashion retailers, after a 51 percent year-on-year (YoY) revenue boost in fiscal (FY) 2023, are expected to face a slowdown in growth for FY 2024 due to inflationary pressures, said a recent analysis by ICRA. Revenue growth is projected to moderate to 10 percent, and operating profit margins (OPMs) are likely to dip by 100 basis points to around 5.7 percent due to a softer demand and high anticipated advertising and promotional spending.
“The fashion retail sector has been facing demand slowdown due to inflationary pressures,” Sakshi Suneja, Vice President and Sector Head – corporate ratings at ICRA. She noted the slowdown was more pronounced in the value fashion segment, with sales per square foot below pre-pandemic levels. Premium segments also showed signs of a demand dip in the fourth quarter (Q4) of FY 2023, according to a press release by ICRA.
Suneja projected demand pressures to last until the first half (H1) FY 2024, but anticipated an improvement with the onset of the festive season and continuous network expansion, which could result in an estimated 10 percent revenue growth for FY 2024.
Despite robust growth in FY 2023, primarily driven by network expansion, OPMs remained 100 basis points below pre-pandemic levels due to increased advertising and promotional expenses. Retailers also made considerable investments in ramping up new brands, especially in the ethnic wear segment.
ICRA predicts increased discounting in H1 FY 2024 to bolster sales, which may further pressure gross margins. However, no significant cut in capex has been announced, considering the expected demand recovery and long-term favourable prospects of the Indian retail industry.
“Physical store expansion is the preferred growth route for the retailers, especially in tier-II and III cities,” Suneja added. Although online sales, accounting for around 8 percent of overall revenues, were earlier expected to grow faster, this trend has now slowed down.
Despite sizeable capex plans and anticipated earnings weakening, large-listed entities’ credit profile is expected to moderate in FY 2024 but improve in FY 2025 as demand conditions improve.
