Industry Risk Score : Apparel Retail

Executive Summary

The apparel retail industry in India is estimated at Rs. 2,970 billion. It is expected to grow at a compound annual growth rate (CAGR) of 9.7% to reach Rs. 7.5 trillion in 2026 . The unorganised sector comprises 75-80% of the industry, indicating a huge potential for the organised sector. Within the organised sector, the apparel industry has the third largest share after footwear,information technology(IT) and consumer durables.

India's demographic dividend, increasing disposable income, growing fashion consciousness, and online retailing are some of the factors that are pushing the market growth particularly in the organised segment in the apparel industry across India. Several Indian as well as foreign retailers and online sellers are competing with each other to capture the market. Due to the intense competition, they are under constant pressure to manage their brand, launch new clothing lines, and offer superior store services at reasonable prices. Though most of the retailers do not undertake manufacturing, they have to bear the risks relating to design, supplier management, inventory, store management, branding, etc.

Though the competition is fierce among the top players, there is enough potential in the industry for players to thrive provided they are able to build sufficient customer base, develop their own niche styles, control costs and offer quality products at competitive prices.

The apparel industry stands to benefit from the implementation of GST and relaxation of FDI norms. However, the retailers continue to face various hurdles in the process of setting up new stores due to complex and delayed approvals. Investment in technology is also an important monitorable. While all the top players are adapting to the growing e-commerce models, only a few of them will be able to find their sweet spot of investment and margins in the medium term.

Key Risks & Attributes

  • Seasonal demand, closely linked to economy sentiments
  • Fluctuations in raw material prices
  • Increasing dependence on technology for consumer analytics, inventory management
  • Intense competition and thinning margins in the e-commerce segment
  • FDI policy leading to capital infusion

Demand & Supply Scenario


In 2016, the apparel retail industry in India was worth Rs. 2,970 billion. It is expected to grow at 9.7% CAGR over the next 10 years . The share of organise detail in the total apparel industry stands at 20-25% , offering significant scope for growth.

It is expected that the market for apparel industry will grow at a healthy rate in the near future driven by multiple factors:

  • India has a large working population with higher disposable incomes in metro cities but also Tier I and II cities;
  • Fashion trends are ever-changing where the consumers keep refreshing the wardrobes every season;
  • Increase in the number of shopping malls across India, major brands have penetrated Tier I and II cities as well. The cities also have their own niche stores, which sell clothes more suited to the local community.
  • Demand is also being fuelled by online retailing making available a variety of brands across various price categories with delivery position across the cities in India; it also brings fashion to cities where there are no brick and mortar stores.

However, spending on apparels is discretionary and dependent on the economic health of the country, festival season, etc. Further, Indian consumers are price conscious and want fashionable and quality clothes at reasonable prices.

Acuité believes that demand risk is low, and the apparel retail industry will continue to grow at a healthy and steady rate for the foreseeable future.

Nature & Extent of Competition


Intense competition in the industry as well as expectations of consumers to get the best value for products put pressure on players to manage brands while keeping costs under control. The entry barriers are high if the player wants to set up stores pan India as it requires huge investments and managerial capabilities.

The apparel retail industry is highly fragmented and competitive and can be divided into organised and unorganised sectors. The modern Indian consumer is seeking more value in terms of improved availability and quality of products, return and exchange policies, competitive prices and better store service. This has created an opportunity for the organised retail formats and e-commerce players to grow at a fast pace.

The organised sector has a large number of major players comprising both Indian and foreign retailers. The top Indian retailers are Pantaloons, Shoppers Stop, Tata Trent, Raymond, Globus, Wills Lifestyle, Arvind Mills, Future Group's FBB and Big Bazaar, Reliance Trends etc. These brands have single brand retail outlets as well as large multi-brand outlets.

Some foreign brands have launched their products via joint ventures with Indian retailers like Marks & Spencer with Reliance. Post relaxation of foreign direct investment (FDI) norms in the retail sector, the presence of international brands like Zara, Mango, and H&M is increasing. The advent of foreign brands has increased the competition for Indian players, especially in the premium segment. Retailers in the lower and mid segment remain unaffected. Players are under constant pressure to manage brands to improve visibility, continuously innovate and offer new and quality products, offer exceptional store services, etc., at competitive prices by controlling costs.

Almost all the brands have online presence. Initially, it was mostly used to sell "off-season" inventory at discounted prices. But increasingly, retailers are finding it more effective to sell online as they are able to reach out wider population without undertaking any operational risks related to management of stores apart from the high establishment expenses in brick and mortar model.

Acuité believes that the competition risk is medium. As even though the competition is fierce, there is enough potential in the industry for players to thrive provided they are able to build sufficient customer base, develop their own niche styles, control costs and offer quality products at reasonable prices.

Input Related Risk


Most of the apparel retailers do not manufacture the clothes. Instead, they outsource to manufacturers in India as well as outside India. Thus, retailers have to constantly monitor the operations of suppliers to ensure that they adhere to the norms and specifications set by the brand.

The input related risks are very high for retailers as they have to constantly invest in brand building by launching new styles, marketing them appropriately, ensuring quality of products through strict supervision of suppliers, while dealing with infrastructure constraints. Store management is very costly and integral to the success of retailers. Most retailers though operate at huge gross margins, and make minimal profits, at least in the nascent stage of business. Further, Indian consumers are price sensitive, and therefore, the additional operating cost cannot be passed on to consumers.

Retailers need to offer products in line with the latest trends and consumer requirements. They are under constant pressure to reinvent designs, almost every season. Unpredictable demand and short life cycle of products lead to build-up of "off season" inventory. This results in markdown of products at the end of each season to offload the out of fashion orobsolete inventory. A sizeable number of apparels sold online are perpetually offered at discounted prices.

It is most important for retailers to invest in building their brand image continuously as otherwise they risk losing their loyal consumer base. Some players have incurred substantial losses because they failed to innovate continuously and lost their brand value. Efficient distribution mechanism is essential as in the absence of developed supply chain and integrated IT management, retailers risk incurring high operational costs and reduced profitability.

Finding suitable retail space with ample parking facility also poses a challenge for small and mid-size retailers amid raising lease rental costs. It is also important to hire skilled human resource and retain them by designing appropriate compensation packages and developing effective training and development programmes. These challenges have motivated many retailers to sell online.

Acuité believes that input related risks are substantially moderate and management of these risks is the key to run a profitable business.

Regulatory Risk


The government has put in a regulatory framework to promote the retail industry by relaxing the FDI norms and implementing Goods and Services Tax (GST). However, retailers still find it challenging to set up stores as numerous clearances are required, which add to the cost and time taken to expand in the domestic market.

FDI norms for the retail industry have changed favourably over the years. At present, 100% FDI is allowed in single brand retail business and 51% FDI, in multiple brand retail business. These investments are subject to fulfilling of various conditions by the companies, e.g., they need to source at least 30% of their purchases from India.

GST was brought in force in 2017 and it replaced the various indirect taxation levied by the Centre and states in India. GST rate on apparels below Rs.1,000 is 5% and above Rs. 1,000 is 12%. It aims to simplify taxation and get retailers in the unorganised sector under the purview of taxation. These changes are expected to benefit the large organised players.

A retailer needs to obtain multiple approvals from central, state and local government authorities to commence business. This puts additional financial pressure on retailers as obtaining these approvals cost money as well as lead to delays due to bureaucratic red tape. Stamp duty to register leases for stores is also very high and varies from state to state.

Acuité believes that the apparel industry has benefitted from the implementation of GST and relaxation of FDI norms. However, procedural challenges and delays related to setting up of stores continues to be an impediment.

Technology Risk


Retailers need to focus on business efficiency for improved profitability, for which they have to invest in information technology. Several IT tools are available for inventory management, vendor management, supply chain management, etc. Retail business is data intensive, and it is important to analyse it to enable the management to take appropriate decisions.Increasingly, Artificial Intelligence(AI) and machine learning is picking upaiding the retailers to understand the consumer behaviour and recommend new demand patters.

Ecommerce is flourishing due to availability of smart phones and improvement in net banking facilities. However penetration remains constrained due to high logistics costs in less matured delivery locations.

Acuité believes that investment is technology is an important monitorable for the Apparel Retail industry. While all the top players are adapting to the growing e-commerce models, only a few of them may be able to find their sweet spot of investment and margins in the medium term.

Operating Margin


The operating margin of the industry is relatively low. The median operating margin stood at 8.06% in FY 17. However, the industry is witnessing an upward trend in the median operating margin over the last 3 years.

Interest Coverage


The interest coverage levels have been healthy in line with low debt levels and moderate profitability. The interest coverage stood at a healthy 2.31 times in FY2017.

Return on Capital Employed


The median ROCE for the industry has been very low with continuous investments towards marketing and technology. For FY 2017, it stood at 3.2% improved from 1.97% in FY 2015.

Debt / Equity


The industry had a highly favourable average gearing of 0.53 times during the three-year period of FY 2015 to FY 2017, indicating limited reliance on borrowed funds in the capital mix.



The operations are working capital intensive with gross current asset (GCA) between 118 to 160 days in the past three years ended FY2017.

Industry Financials and Medians

Fact Sheet (As on Year Ended March 31st)SUM Unit 201703 201603 201503
Net Sales Rs. Cr. 37,017.14 24,469.62 14,356.48
OPBDIT (Excl. NOI) Rs. Cr. 2,229.38 1,445.20 574.69
Depreciation Rs. Cr. 733.07 774.10 599.44
PAT Rs. Cr. 657.41 47.77 (433.44)
Net Cash Accruals Rs. Cr. 1,390.48 821.87 166.00
Networth Rs. Cr. 8,630.68 7,340.65 4,533.94
Total Debt Rs. Cr. 5,573.00 6,011.34 4,540.85

Median Unit 201703 201603 201503
EBITDA Margin % 8.06 7.04 6.61
PAT Margin % 1.67 0.77 0.93
ROCE % 3.19 2.03 1.97
Interest Coverage Times 2.31 1.87 1.82
Debt to Equity Times 0.45 0.65 0.49
Debt to EBITDA Times 2.25 3.47 3.06
GCA Days Days 149.99 160.63 118.81

The entities considered in the static pool are as under:
List of Companies

Company Name
Aditya Birla Fashion & Retail Ltd.
Arvind Lifestyle Brands Ltd.
Bioworld Merchandising (India) Pvt. Ltd.
Future Lifestyle Fashions Ltd.
Future Retail Ltd.
Shoppers Stop Ltd
Trent Ltd.
V 2 Retail Ltd.
V-Mart Retail Ltd.

IRS Definitions

Acuité Industry Risk Scores are assigned on a six-point scale, with 1 indicating 'High Risk' and 6 indicating 'Highest Safety'. The intermediate scores are defined in the table below:

Industry Risk Score Risk classification of the Industry
ACUITE IRS 1 Highly Unfavourable
ACUITE IRS 2 Unfavourable
ACUITE IRS 3 Neutral
ACUITE IRS 4 Marginally Favourable
ACUITE IRS 5 Favourable
ACUITE IRS 6 Highly Favourable


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