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Credit rating agency ICRA in its latest report has said that after reporting a stellar 51% YoY revenue growth in FY2023, revenue growth of fashion retailers is set to moderate in the current fiscal (FY24) amid inflationary headwinds. According to ICRA’s most recent industry analysis, revenue growth of 11 listed retail entities in its sample set will moderate to 10% in FY2024. It said their operating profit margins (OPMs) are also expected to decline by 100 bps to around 5.7%, given the demand slowdown and sharp increase in advertisement and promotion expenses undertaken by the retailers to make up for the lost sales of FY2021 and FY2022. The rating agency currently has a Stable outlook on the retail sector.

According to the report, most large retailers also acquired/launched brands in newer categories, especially in the ethnic wear segment and have been undertaking substantial investments to ramp up these brands. Retailers as of now, have not indicated any reduction in ad spends in the coming quarters as they are hopeful of demand recovery in H2 FY2024. ICRA also expects discounting levels to go up in H1 FY2024 as retailers look to shore up sales, which shall exert some pressure on the gross margins.

The report stated that following limited retail space addition in FY2021, retailers resumed their store expansion plans in FY2022 and FY2023 and added nearly 5.2 million sq. ft (reflecting 30% addition over the retail space as on March 2021) of space during this period. Total capex outlay on store additions of entities in ICRA’s sample set increased YoY by 60% (partly aided by a low base) to Rs 1,460 crore in FY2023, despite a slowdown in the value fashion segment. No major pruning of capex has been announced by retailers so far, given the expected demand revival and favourable long-term demand prospects of the Indian retail industry. Capex outlay towards store additions is thus expected to increase further by 10% to Rs 1,600 crore in FY2024.