Retail sector revenues to surpass pre-Covid levels by 6% in FY23: ICRA

The retail sector is coming out of the woods and is expected to surpass its pre-pandemic levels of revenues and earnings in 2022-23, following two years of sub-par financial performance, according to rating agency ICRA.

ICRA has revised the sector's outlook to “stable” from “negative”, saying retail firms will see an increase in sales of 12-13% year-over-year in FY23, which is a 5-6% increase above pre-pandemic levels.

Operational profit margins of retail companies are expected to increase by 150 basis points year-on-year to 8.2%, the rating agency says.

"Driven by pent-up demand, improving vaccination coverage and a pick-up in economic activity, the retail sector reported a healthy recovery in sales, post the second Covid-19 wave. While the operations were temporarily affected by the third wave in January and February 2022, the sector bounced back swiftly in March 2022. Consequently, sales recovered to up to 90% of pre-Covid levels in FY22,” says Sakshi Suneja, vice president and sector head, ICRA.

With the footfalls breaching the pre-pandemic levels in Q1 FY23, retail entities are expected to witness a 5-6% revenue growth in FY23 vis-à-vis the pre-Covid period of FY20, Suneja says.

“Notwithstanding the near-term challenges in terms of inflationary pressures, positives in the form of favourable demographics, rising disposable incomes, and low penetration of organised retail, augur well for the prospects of the industry over the medium term,” she adds.

The level of discounting by the retail industry remained low during FY21 and FY22 (compared to FY20) as retailers attempted to protect their gross margins against the backdrop of reduced sales. With footfalls and revenues surpassing the pre-pandemic levels in FY23, ICRA expects the level of discounting to go up as retailers compete to grab a higher share of the consumer’s wallet.

Besides material costs, rental, employee costs, and promotional expenses are the other key cost heads of a retail entity, typically accounting for 29-30% of its total cost, according to ICRA.

After the strict cost rationalisation seen in FY21, retailers largely rolled back the cuts on employee expenses and advertising expenses in FY22. Retailers undertook rental negotiations in FY22, following the sporadic restrictions on mobility. However, the extent of concessions received was markedly lower vis-à-vis FY21. While these costs will rise further in FY2023, the OPM (operational profit margins) will expand as a result of healthy revenue growth and the benefits of economies of scale, the rating agency says.

Driven by a buoyant demand outlook and recovery in footfalls, retailers are expected to continue with their store expansion plans in the ongoing fiscal, says ICRA, adding that retailers are expected to increase their capital spending by over 45% in FY23, with store additions largely targeted towards Tier-II and Tier-III towns.

“The retailers will also continue focusing on expanding their omni-channel presence, with the share of online sales going up to 12-14% of revenues by FY2024, vis-à-vis 8% in FY2022. However, it is unlikely to replace the brick-and-mortar sales model any time soon,” says Priyesh Ruparelia, vice president and co-group head at ICRA.