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October 31, 2018 location Mumbai

Capex of brick & mortar retailers to rise 60% over 3 fiscals

Credit outlook to remain positive on the back of strong cash accruals

Capital expenditure (capex) of CRISIL-rated organised brick & mortar (B&M) retailers is expected to increase 60% between fiscals 2019 and 2021 compared with the previous three fiscals, driven by a 300 basis points (bps) increase in revenue growth to 18% expected over the same period.


This is based on an analysis of 87 CRISIL-rated B&M retailers, mainly in the food & grocery (F&G) and apparel segments, which account for almost 50% of organised B&M revenues for the sector.


The pick-up in revenue growth is expected to be driven by recovery in household private final consumption expenditure (PFCE), more store rollouts with focus on private-label revenue, and increasing penetration of B&M retailers in Tier-II cities.


Over the next three fiscals, growth in PFCE is expected to improve and remain in the vicinity of 8% compared with 6.3% in fiscal 2018, with disposable incomes foreseen rising.


Additionally, the share of the more profitable private-label segment, which has been a driver of overall revenue growth, should continue to rise.


B&M retailers have also been sharpening focus on Tier-II cities, a testimony to which is the fact that last fiscal, 75% of store additions have been in that geography. Here, they are following the path of e-retailers, which have achieved better penetration beyond Tier-I cities.


“The acceleration in revenue growth is allowing domestic organised B&M retailers to step-up on capex and compete with global retail giants increasing their presence in India,” said Anuj Sethi, Senior Director, CRISIL Ratings. “We expect capex of CRISIL rated B&M retailers to reach Rs 12,500 crore during fiscals 2019-2021, compared with Rs 7,500 crore incurred between fiscals 2016 and 2018.”


Capex over the next three fiscals will lead to annual store space addition of 20% for F&G and 15% for the apparel segment – both higher by 5% compared with space addition over the previous three years.


In addition to store expansion, large B&M retailers are also increasingly taking the partnership route, including with e-retailers, to enhance reach and products portfolio, solidifying their market position, without materially denting their balance sheets.


The improvement in credit profiles is already reflected in the credit ratio (upgrades to downgrades) for CRISIL-rated B&M retailers remaining above one time since fiscal 2014, and in the first half of fiscal 2019, as well.


“Despite higher capex spend, CRISIL expects the credit profiles of the B&M retailers it rates to benefit from improving credit metrics due to better cash generation, which will obviate the need for material debt addition,” said Gautam Shahi, Director, CRISIL Ratings. “For instance, the debt to Ebitda ratio for B&M retailers, which improved to about 2.1 times in fiscal 2018, from 3.7 times in fiscal 2016, is likely to improve further to below 1.5 times by fiscal 2021”.


Government regulation, and the ability to manage operating profitability, despite increased store addition, will be key monitorables.


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