Despite an estimated 13 percent YoY revenue growth in fiscal 2023-24 (FY2024), fashion retailers in India are expected to see their profit margins decline. According to ICRA, 11 listed retail entities accounting for 23 percent of the industry will experience a profit margin reduction of close to 120 basis points, landing at around 5.2 percent in FY2024.
The downturn in profit margins is attributed to higher discounts and increased advertising and promotional expenses. These measures have been taken to bolster revenue growth, which is expected to be supported by the expansion of store networks. Inflationary pressures have continued to create headwinds since third quarter (Q3) FY2022, especially impacting the value fashion segment.
Despite this, ICRA expects the industry to report a flat QoQ revenue growth in Q2 FY2024, with meaningful growth anticipated to resume in Q3 FY2024, in part due to the shifting of the festive season. For FY2024, ICRA estimates a 13 percent YoY revenue growth, supported by network expansion.
ICRA’s analysis also shows a 27 percent YoY increase in retail space in FY2023, with a capital expenditure of Rs. 1,460 cr. Capex is expected to further increase by 18 percent in FY2024 to Rs. 1,750 cr, primarily for new store additions. The agency maintains a stable outlook on the retail sector, anticipating long-term demand prospects to remain favourable.
Commenting on the trends, Sakshi Suneja, Vice President & Sector Head, – Corporate Ratings, ICRA, said: “In line with our expectations, fashion retailers increased their discounting levels in YTD FY2024 to spruce up sales, which have been under pressure since the last festive season due to inflationary pressures. Retailers are pinning hopes of a demand recovery on the festive season and thus, continue to spend aggressively on advertisement and promotions. Most large retailers are also undertaking substantial investments to ramp up the visibility of their brands in the ethnic wear segment, which have been acquired/launched recently. Consequently, despite moderate revenue growth, operating margins are set to contract in FY2024 and trail their pre-pandemic levels by around 270 bps.”
