Covid-19 Outbreak Credit Negative For India’s Retail Industry, Says ICRA

The coronavirus outbreak is credit negative for India's retail industry in the short-term amid a shutdown of malls as well as the closure of non-essential stores across the country, rating agency ICRA Ltd. said in a report.

ICRA in a report said that as consumers are forced to defer their discretionary spending, the revenues and profitability and the credit profile of the Indian retail industry will be adversely impacted in the short-term.

Also, with the anticipated adverse impact on the economy and consequent uncertainty around employment prospects, it is likely to result in lower purchasing power, ICRA said. Additionally, consumer sentiments are likely to remain weak in an adverse economic environment.

Consequently, recovery in discretionary spending is expected to be gradual once the Covid-19 threat is allayed and ICRA expects the credit profile of retailers dependent on discretionary spending to moderate in the next one year. This impact is, however, expected to be mitigated in the long-term driven by a healthy demand outlook for the industry supported by favourable demographics, rising disposable income and low penetration of organised retail.

"Lifestyle and fashion retailers (primarily those having higher contribution of apparels, consumer durables, jewellery, accessories, and footwear, among others) will be impacted the most because of these restrictions and overall curtailment on the movement of people, resulting in demand pressures over the short-term," ICRA Assistant Vice President Sakshi Suneja said.

However, the food and grocery retailers have witnessed a sudden spurt in demand as consumers have started panic-buying around uncertainties of stock-outs and closure of these stores as well, Suneja further said. In addition to demand, the Indian retailers are also facing supply chain issues as transportation or movement of non-essential goods is also restricted.

Even after malls are allowed to start operations, the discretionary spends are expected to remain muted over the near term as consumers, as a means of caution, are likely to stay away from crowded places. ICRA, however, expect the sales for lifestyle retailers to pick-up following normalisation of the situation led by a rise in demand by consumers who postponed purchases during the coronavirus outbreak.

However, the impact on the value fashion segment would be more pronounced. ICRA Vice President Kinjal Shah said that due to the high operating leverage inherent in this industry, these lost sales will result in a decline in the profitability of the retailers in Q4FY20 and Q1FY21.

High rental expenses for mall-based retailers will additionally dampen their profitability amid subdued demand, he said. However, many of these retailers may invoke force majeure clauses in their agreements so that they do not have to pay rentals during this period of shutdown, thereby limiting impact on their profitability, Shah added.

"Furthermore, we expect retailers to scale down their capital expenditure plans in FY21, in a bid to conserve cash," he said. The present scenario, however, provides a favourable opportunity for e-commerce food and grocery players. The outbreak of the coronavirus has led to a sharp surge in online grocery retailing as consumers are wary of stepping out of their homes.

These platforms are witnessing increased demand not only from the existing consumers but also from new consumers. This, however, poses supply chain challenges for the online retailers amid increased demand and it will be important for retailers to timely invest in capacity, storage, and delivery fleet.