Apparel Is Out of Fashion; Grocery Is Resilient, Says Report
Retail demand for food and grocery (F&G) is likely to remain flat, while the apparel demand could decline by 40%-45% in FY20-21, in the context of a slowing economy pressuring household income, and prevalence of social distancing norms, says a note.
 
In the report, India Ratings and Research (Ind-Ra) says since F&G are essential goods and, hence, the revenue decline in 1QFY20-21 was only 10%-15% year-on-year (y-o-y), as against the 80% yoy drop for apparel retailers. The agency expects the pace of normalisation to be gradual, particularly in apparel retail, as the intermittent lockdowns would hinder footfalls.
 
Ind-Ra has assigned a stable outlook on the F&G retail sector for 2HFY20-21, while the outlook is stable-to-negative for apparel retail. 
 
 
As per the ratings agency, retailers have targeted cost savings across employee expenses and discretionary spends such as advertising, travelling and overheads, to mitigate the adverse operating leverage. Rentals have been renegotiated and converted into variable expenses, moderating the impact on earnings in FY20-21. 
 
Ind-Ra says it expects the EBITDA (earnings before interest, taxes, depreciation, and amortisation) of apparel retailers to be down significantly, while it will contract around 10% yoy for F&G retailers in FY20-21 compared with 26.5% yoy in FY19-20. 
 
It says, "New store roll-outs were deferred during 1HFY20-21 to conserve liquidity, and would hinge on recovery trends. 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 FY20-21." 
 
 
Yet with organised retail only around 12% of overall retail, Ind-Ra says it expects a favourable medium-term backdrop, particularly in the underpenetrated Tier II+ cities and F&G retail with less than 5% organised penetration is expected to grow faster. 
 
Ind-Ra has maintained a stable rating outlook on its retail portfolio for second half (2H) of FY21, led by strong business profiles and adequate liquidity buffers. The ratings agency says it continues to monitor the recovery in sector revenues and will take appropriate rating actions in case the rebound in sales is significantly below its expectations. 
 
It expects revenues to recover to FY19-20 levels in FY21-22 for apparel retail, while it is expected to grow by over 10% y-o-y for F&G retail. Network expansion in under-penetrated areas would drive revenue growth in the medium-term. 
 
With expansion plans primarily funded through cash accruals, limited working capital debt, and equity infusion in FY20-21, Ind-Ra says it expects the net leverage of its rated portfolio to improve to 1.0 times in FY21-22, after deteriorating in FY20-21. 
 
"The liquidity indicator of all the rated entities is adequate, led by the availability of cash, unused lines, comfortable free cash flows for FY19-20, and in certain cases, backed by strong promoter groups," the ratings agency added.
 
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    Telecom Sector Turnaround Continues in Second Half of FY20-21: Report
    India Ratings and Research (Ind-Ra) has revised its sector outlook on the telecom sector from negative to stable for the second half of FY20-21 (H2FY20-21), due to the resolution of regulatory overhang and moderation in competitive intensity so far in FY20-21, compared to the past two to three years.
     
    In a report, the ratings agency says, "Even without tariff hikes, the sector has been structurally moving towards a higher average revenue per user (ARPU) regime as is evident from the rising proportion of higher-ARPU data customers in the overall subscriber mix. Competition intensity is alleviating, as exemplified by the lack of any competitive tariff cuts by telcos in the past 12 months and gradual reduction in tariff differentials among them." 
     
    Ind-Ra says it believes that higher-than-expected investments in spectrum acquisition or 5G deployment remain a risk, albeit the selected telcos have sufficient balance sheet strength. The evolution of the industry over the coming quarters will determine whether the mobility market will remain a 3+1 player market or will transition to a 2.5+1 player market, it added.
     
    Ind-Ra has also revised the rating outlook for H2FY20-21 on its rated entities to stable from negative, since the entities have displayed an improvement in their financial profile, backed by rising profitability and consistent deleveraging initiatives. 
     
    It says, while Reliance Jio Infocomm Ltd’s ‘IND AAA’/Stable ratings are furthered by timely financial support from its parent Reliance Industries Ltd, the ratings of Bharti Airtel Ltd, debt rated at ‘IND A1+’ are supported by its diversified revenue profile and a resurgent Africa business. 
     
    "While the recent ruling on adjusted gross revenue (AGR) dues has certainly provided the much-needed liquidity cushion to the telcos, credit profile of Vodafone-Idea Ltd remains to be monitored, given consistently falling market share, weaker profitability, stretched liquidity and rising debt levels," Ind-Ra says.  
     
    Moreover, according to the ratings agency, COVID-19 is not expected to have a material impact on the sector, due to the essential nature of services being provided. 
     
    Although the GDP slowdown, coupled with weak rural wage growth in FY20-21 is expected to marginally delay consumer shift to high ARPU (average revenue per unit) broadband plans and adversely impact India’s 5G roll-out, the data usage and enterprise business activities could surge. 
     
    "That being said, we believe that the movement in subscriber base needs to be monitored to identify whether the loss in subscribers in the four months ended June 2020 was transitory," Ind-Ra concludes.
     
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    FY21 Auto Volumes To Remain at Decade Low; Full Recovery Likely from 2HFY22: Ind-Ra
    Auto sales in domestic market would remain at a decade low level of about 20% to 25%, however due to the weak consumer sentiments and disruptions caused by the coronavirus (COVID-19) pandemic, full recovery would be only from the second half of FY21-22 (H2FY21-22), says a research note.
     
    In the report, India Ratings and Research (Ind-Ra) says it maintained a negative outlook for the auto sector for 2HFY21 on account of continued weak consumer sentiments and macroeconomic headwinds amid COVID-19 led disruptions. "We expect domestic auto volumes to decline 20%-25% year-on-year (y-o-y) in FY20-21, which is marginally better than the earlier forecast of 22%-25% in June 2020," it added. 
     
    According to the ratings agency, the change is mainly due to increasing preference for personal mobility and expectation of a stronger demand rebound from rural and semi-urban markets than from urban markets, in particular positive for passenger vehicles (PVs) and two-wheelers (2Ws). 
     
    Both PVs and 2W sales could fall 18%-21% yoy in FY21. Decline in commercial vehicle (CV) sales would be 30%-35% y-o-y in FY20-21, on account lower economic activities. 
     
    Ind-Ra further expects auto volumes could post double-digit growth (in mid-teens) in FY21-22 primarily due to a lower base over FY20-FY21.
     
    It says, "Lower affordability due to job losses or loss of income would shift consumers’ preference towards lower-end vehicles especially PVs. In 2Ws, motorcycles will continue to outperform scooters as the former derives substantial demand from rural markets." 
     
    "CVs and more specifically medium & heavy CVs (MHCVs) would continue to see a muted demand due to lower industrial production and excess capacity in the system, and any demand revival thus is unlikely before fourth quarter (4Q) of FY22. Light commercial vehicles (LCVs) are likely to benefit from increased e-commerce, and last mile transportation particularly for essential commodities," it added.
     
    Ind-Ra says it expects limited rating movements in the sector in H2FY20-21 and, thus, has maintained a stable rating outlook. It says, "We expect revenues to decline 16%-20% yoy during the year with EBITDA margin contracting 100-150bp on lower operating leverage, leading to moderated credit metrics in FY20-21. However, lower leverage and robust liquidity are likely to continue to provide strong financial flexibility." 
     
    According to the ratings agency, original equipment manufacturers (OEMs) with greater presence in agriculture-based markets are likely to benefit. Margins and credit metrics of CV and diversified players with a higher proportion of CV sales are likely to be impacted more than players in PV and 2W, it says, adding credit metrics are likely to improve in FY21-22 as profitability starts to normalise, though will not reach FY19-20 levels. 
     
    Refinancing risk is low for the industry and there is adequate rating headroom, the agency added.
     
    Ind-Ra says, "The supply-side risks continue to persist, despite unlocking, given the swift spread of COVID-19 in tier-I/ tier-II cities where several plants of original equipment manufacturers and auto ancillaries are located. Further, as capacity utilisation picks up, the issues related to lack of trained manpower, due to reverse migration, could emanate."
     
    "Favourable regulatory changes such as goods and services tax (GST) cuts or incentive based scrappage policy could help demand revival in the medium term. However, any significant spread of the virus to rural India could affect the recovery trend due to further disruptions in those parts of the economy," it concludes.
     
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