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Discounts can revive consumer spends in Indian retail industry

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Fitch

The growth in the Indian retail sector has become negative from stable, according to global research firm, Fitch Ratings. The reason behind the downbeat stems from sustained deterioration in the discretionary spending ability of consumers. The agency further predicts that the condition is unlikely to improve over the short term.

Fitch has revised its real GDP (gross domestic product) forecasts to 6.5 per cent and 7 per cent, from the earlier 7.5 per cent and 8 per cent in FY13 and FY14, respectively. The agency believes that the worsening business conditions could negatively impact credit profiles, while the impact on individual retailers would depend on their ability to manage their capital structures. Moreover, the Private Final Consumption Expenditure (PFCE) growth rate, which was weakest in the last seven years, is unlikely to improve significantly unless consumer price inflation declines and consumers receive a significant raise in real wages.

The finding further reveals that the same-store sales growth of retailers has slowed down across lifestyle and value-based formats from Q3 of 2012. The firm feels that this could be checked by offering discounts, which in turn would help boost volumes and consequently overall revenue. However, this may lead to an erosion of gross margins, which retailers may counter by adopting cost-rationalisation measures as seen in the past. Nevertheless, pressures on operating margins are likely to remain, given that a large part of these costs are fixed in nature.

The agency also suggests that with likely margin contraction, expansion plans, along with increased need for inventory as retailers open up new stores, will increase working capital requirements, which will be largely debt funded. However, companies have been implementing various strategies to contain the debt, including raising equity and selling certain non-related assets and business segments, which may help in maintaining credit profiles.

The inventory holding period increased by a marginal extent in the first half of the current fiscal, with a reduction in the credit period availed from creditors. The expected lower operating profitability as well as higher funding costs and working capital requirements should continue to exert pressure on operating cash flows.

According to the agency, the outlook to the retail industry will become favourable with eventual sustained reduction in consumer price inflation, coupled with a rise in real wages. This along with an increase in household savings and the associated benign impact of a positive wealth effect on consumer sentiment could change the outlook to stable. Also liberalisation of the multi-brand segment could provide easier access to foreign direct investment. This in turn will have a positive impact on the capital structure and liquidity profile of companies in this sector.

Some of the Fitch-rated Indian retailers are Pantaloon Retail India, Shoppers Stop and Tristar Retail.

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