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Monday 21 August 2017
News updated at 5:14 PM IST

Ind-Ratings retains negative outlook for retail sector in FY15

Mumbai, Jan 26, 2014, (PTI) 15:19 IST
India Ratings has retained its negative outlook for the retail sector the next fiscal as well with a stable bias, and ruled out revising it to positive near-term. Reuters File Photo.
India Ratings has retained its negative outlook for the retail sector the next fiscal as well with a stable bias, and ruled out revising it to positive near-term.

Moderate single-digit revenue growth and operational efficiencies translating into stable margins comparable to levels seen thus far in FY14 will result in marginal improvement in credit profile from FY13 levels for most retailers, which is not strong enough to revise the negative outlook, the rating agency said in its report while retaining its negative outlook.The report also said a positive outlook for the sector is unlikely in the near future.

Given the low consumer confidence, deterioration in real wages and low private final consumption expenditure, the agency said it did not envisage a change in the outlook to positive even in the event of a modest revival in sales and margins.

However, a sustained reduction in consumer price inflation, coupled with a rise inreal wages, is likely to restore the discretionary spending power of consumers, it added.

But a sudden spurt in government spending may have a temporary beneficial impact on private consumption, ultimately benefitting the sector, it added.

The agency expects the median pre-tax margins next fiscal to remain at levels observed thus far in FY'14.

Operational efficiencies translating into stable margins as seen in H1 of FY14 would marginally improve credit profiles of most retailers from FY'13 levels.

For H1 of FY14, the median operating margins improved by 87 bps y-o-y. As such, FY13 was possibly the weakest period since FY10 for the retail sector with margins falling by 110 bps from FY12. However, efforts by retailers to deleverage by monetising non-core businesses could be positive for the sector, the report said.

The agency expects urban consumer sentiment to remain subdued in FY15 amid reduced affordability. Per capita consumption expenditure for Q2 was at 2.2 per cent from 1.6 per cent in Q1, the second lowest growth observed in the last 37 quarters.

While some improvement in capex and industrial activity is anticipated post first half of (April-September) FY15, subsequent real wages and urban consumption growth will likely be seen only after FY'15.

It expects overall median revenue growth for the sector to be in the range of 8 to 10 per cent in FY15. Muted consumer spending due to economic uncertainties will likely drag into FY15 and same-store-sales growth will taper down for the year.

The agency continues to view FDI-based equity infusion to be a theoretical possibility. FDI investment in retail has always been plagued with operational risks and implementation uncertainty given regulatory stranglehold along with lack of political consensus.

The risk has only increased of late to the extent that foreign investors may additionally face a regulatory/ reputation risks in home jurisdictions.

Recent instances of alleged questionable practises, under the existing Foreign Corrupt Practises Act, may further increase the challenge of attracting FDI in sectors such as retail, the report concluded.

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