India Ratings and Research (Ind-Ra) has maintained a stable outlook on the food and grocery (F&G) retail sector for FY22. F&G, being essential in nature, remains resilient with business performance coming back to its pre-covid level from 3QFY21 post temporary headwinds in 1HFY21. Organised players and ecommerce will continue to be the fastest-growing segments.
The impact has been disproportionate across the course of the pandemic. Large format stores were more severely affected at the beginning of the lockdown due to restricted store operations and lower footfalls, as consumers preferred nearby small format and local kirana stores for purchases. Inventory availability, which took a hit during initial months of the lockdown due to pent-up demand for essential grocery items, has normalised with the resolution of supply chain issues. With the disruptions of the lockdown behind, Ind-Ra expects a stable performance in FY22 for F&G retailers.
Ind-Ra expects part of the cost rationalisation measures undertaken by retailers during the pandemic-led crisis to be sticky and sustain even after achieving business normalcy starting FY22, thereby structurally improving the margin profile of apparel retailers.
Competition is likely to remain fierce with consolidation in domestic retail and rapid growth of the e-commerce industry, which received a significant boost in FY21. While retailers have been pushing omnichannel offerings for the past few years, the pandemic has accelerated digital transformation forcing retailers to invest more rapidly in their omnichannel offerings. Grocery, which has lagged retail generally in e-commerce penetration, saw significant omnichannel interest in FY21, including delivery and in-store or curbside pickup of online orders.
Ind-Ra has revised the rating outlook on its grocery retail portfolio to Positive for FY22 from Stable, led by a strong market position, geographical diversified presence and healthy liquidity. The agency continues to monitor sector revenues and profitability and will take appropriate rating actions in case the rebound in sales is significantly below its expectations.
Ind-Ra expects the F&G segment's revenue to remain flattish/ grow modestly in FY21, before growing over at 10% yoy in FY22. EBITDA margins are expected to remain under pressure in FY21 due to the subdued sales of the margin-accretive non-food categories such as general merchandise. Margins are expected to bounce back to pre-covid levels in FY22 with a gradual recovery in the sales of these categories. The structural cost-saving measures undertaken during FY21 would be accretive to the margins. Network expansion has accelerated with business visibility in sight and focus on under-penetrated areas, which would drive revenue growth in the medium term. Expansion plans would primarily be funded through cash accruals, limited working capital debt, and equity infusion in FY21. Liquidity indicator of the rated entities is adequate, led by the availability of cash, unused lines, and in certain cases backed by equity infusions by strong promoter groups.
