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 Companies in the apparel retail sector are expected to weather the near-term demand volatility and sluggishness through effective liquidity management, while also improving their competitive advantage by increasing the operational efficiencies and controlling costs, India Ratings and Research said on Thursday.

Accordingly, the ratings agency said profitability will be affected in FY21 due to an expected 40-45 per cent decline in the revenues. Companies have focused on cash preservation by taking a multi-pronged approach.

"They have undertaken additional borrowings to manage cash losses, while deferring their capital expenditure and dividend payments to conserve liquidity," the ratings agency said in a statement.

"Ind-Ra expects a demand recovery from the second half of 3QFY21 during the festive season, assuming that Covid-19 related fears will subside. However, the household income would continue to be under pressure throughout FY21."

According to Ind-Ra, robust sales growth in FY22 will lead to strengthening of the financial profile, closer to levels seen in FY19 and FY20.

"... FY22 will see a sharp recovery year on year with a lower base effect and new store openings as the organised sector's share continues to grow," the statement said.

"In fact post Covid-19, the shift to organised from unorganised would accelerate, as small players would find it difficult to sustain operations, given lower footfalls, apprehension among customers related to store hygiene and sanitisation, and credit crunch, making the business unviable."

As per the statement, the upward sales trend witnessed in June 2020 was slowed down by intermittent lockdowns across the country, and the pandemic spreading to non-metro cities as well.

"Despite about 80 per cent of stores being open as of August 2020, the sector could only witness a slow-but-incremental recovery with the prevalence of social distancing norms to prevent the spread of virus, leading to reduced footfalls in stores, and prioritisation of spends towards essentials and low-ticket discretionary items amidst a squeeze on income levels," the statement said.

"Ind-Ra expects sales of around 45 per cent of the pre-Covid levels. "

It added that a meaningful recovery, driven by the pent-up festive and wedding season demand in Q3FY21 is expected, even as social distancing norms and a slowing economy will continue to be a drag.

"Overall, Ind-Ra expects sales to touch around 85 per cent of the pre Covid-19 levels," the rating agency said in the statement.

"Consumer behaviour patterns such as revenge buying may play out and support revenues."