Profit margins of Indian fashion retailers to contract in FY2024: ICRA

24 Sep '23

2 min read

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Insights

Despite a projected 13 per cent YoY revenue growth in FY2024, fashion retailers in India could see a decline in profit margins.
About 11 listed retail firms, making up 23 per cent of the industry, are expected to experience a profit margin drop of nearly 120 basis points to 5.2 per cent due to higher discounts, elevated advertising costs and inflation.

Despite an estimated 13 per cent 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 per cent of the industry will experience a profit margin reduction of close to 120 basis points, landing at around 5.2 per cent 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 per cent YoY revenue growth, supported by network expansion.

ICRA's analysis also shows a 27 per cent YoY increase in retail space in FY2023, with a capital expenditure of ₹1,460 crore. Capex is expected to further increase by 18 per cent in FY2024 to ₹1,750 crore, 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.”

Fibre2Fashion News Desk (KD)

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