Festive and wedding season and increasing preference for fast fashion is expected to help the organised retail apparel sector log 8-10 per cent revenue growth this financial year, a report said on Tuesday.
The organised retail apparel sector will clock a revenue growth of 8-10 per cent this fiscal riding on higher demand stemming from a normal monsoon, easing inflation, festive and wedding season and increasing preference for fast fashion, which is inexpensive, trendy clothing that mimics high fashion designs and popular styles, Crisil Ratings said in a report.
"The mass market segment accounts for 60 per cent of total sales now, compared with 56 per cent before the pandemic, due to the rising popularity of fast fashion, which is expected to be the primary revenue driver this fiscal. The likely increase in demand for premium clothing during the upcoming festive and wedding seasons will also contribute to overall revenue growth of 8-10 per cent this fiscal," Crisil Ratings Senior Director Anuj Sethi said.
However, revenue growth will be slower than the compound annual growth rate of 11-12 per cent seen between fiscals 2018 and 2023, making retailers cautious at opening new stores, the report noted.
Instead, retailers will focus on enhancing efficiencies at existing stores, controlling costs and limiting reliance on external debt, which will help maintain their operating margin at 7.2-7.4 per cent despite continued high marketing expenses, thereby ensuring stable credit profiles, it added.
In the apparel retail business, the mass market is the largest segment, followed by premium and luxury.
Fast fashion, a growing subset of the mass market, offers the latest trends, frequently updated throughout the season with a shorter lead time to reach customers quickly.
The report said that retailers are adjusting business strategies, enhancing supply chain efficiency and focusing on new trends - particularly in fast fashion - to meet the evolving consumer behaviour.
With consumer spending shifting towards travel experiences and luxury goods in major urban locations, retailers will be cautious at store expansion there, while continuing to expand in tier II and III cities, which are transitioning towards organised retail.
The area addition will be lower year-on-year at 2.2 million square feet compared with 3.6 million square feet last fiscal as store sizes will be smaller, said the report.
Meanwhile, Crisil Ratings further said that revenue density is expected to remain flat at ₹11,900 per square foot due to muted growth in same-store sales and will restrict significant improvement in profitability.
"The marginal increase in profitability this fiscal will be driven by apparel retailers streamlining existing stores and opening new stores only as necessary, given that demand has not fully recovered. Besides, the need to offer higher discounts and incur marketing spends to attract customers will limit the overall improvement in operating margin to 7.2-7.4 per cent against 7 per cent in fiscal 2024," Crisil Ratings Associate Director Anil More said.
According to the report better inventory management and stable input costs will prevent significant inventory write-offs, unlike last fiscal when sharp cost changes lowered profitability by 100-110 basis points.
Consistent cash flow and limited reliance on debt to fund store expansion will lead to adequate debt metrics.
Interest coverage and total debt/EBITDA (earnings before interest, taxes, depreciation, and amortisation) ratios of apparel retailers are expected to be 6.2 times and 1.7 times, respectively, in 2024-25, in line with last fiscal, it added.
However, changes in commodity prices, inflation trends, consumer spending behaviour, and retailers' ability to sustain the momentum in the fast fashion segment needs to be watched, added the report.