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India’s retail sector outlook revised to negative for H212

07-August-2012
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India’s retail sector outlook revised to negative for H212

Fitch Ratings has revised the second half of 2012 (H212) outlook for the Indian retail sector to negative from stable in view of a sustained deterioration in the discretionary spending ability which is unlikely to improve over the short-term.

Fitch has revised down its real GDP forecasts to 6.5 per cent and 7.0 per cent from the earlier 7.5 per cent and 8.0 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.

The Private Final Consumption Expenditure (PFCE) growth rate, which was weakest in the last seven years in first half of 2012 (H112), is unlikely to improve significantly unless consumer price inflation declines and consumers receive a significant raise in real wages.
The same-store sales growth of retailers has decelerated across lifestyle and value-based formats from Q312.

Fitch expects retailers to combat slowing SSG across format (lifestyle and value) 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 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 H112, 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.

A sustained reduction in consumer price inflation, coupled with a rise in real wages, is likely to restore the discretionary spending power of Indian consumers. 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.

A stable outlook may also result from liberalisation of the multi-brand segment which could provide easier access to foreign direct investment and would 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.

What could change the outlook?
Stabilisation in spending power: A sustained reduction in consumer price inflation, coupled with a rise in real wages, is likely to restore the discretionary spending power of Indian consumers. In addition, a pick-up in household savings and the associated benign impact of a positive wealth effect on consumer sentiment could change the outlook to stable.

Uncertainty regarding FDI: Liberalisation of the multi-brand segment could provide easier access to Foreign Direct Investment (FDI) and would have a positive impact on the capital structure and liquidity profile of companies in this sector.

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