MUMBAI (Commodity Online): India retail industry seems to go through hard times as weakness in consumer spending due to rising inflation, marginal real wage growth and a weak macro-economic environment, according to India Ratings.
The rating levels of India Ratings-rated retail companies have already factored in revenue declines and margin pressures; this contributes to the high proportion of Stable Outlooks. Some companies with deteriorated credit metrics also have Stable Outlooks as the agency has already taken sufficient action to accommodate foreseeable stress.
India Ratings expects muted revenue growth for most industries dependent on consumer spending including retail. The trend in Private Final Consumption Expenditure (PFCE) is even more worrisome since out of the last six quarters, four quarters had the lowest PFCE growth rate in the last 34 quarters. PFCE was at an eight-year low at 3.68% at end-Q213. India Ratings does not expect a meaningful improvement in PFCE in 2013.
Median EBITDA margins for the sector are likely to contract by 50bps-75bps in 2013, while overall revenue is likely to grow at 3.0%-8.0% yoy across large retailers. Sales in 2012 were driven by discount offers; and the trend is likely to continue in 2013, providing volume growth at the cost of margin. Retailers focussed on the luxury or premium segment may be worst hit than those focussing on other segments, with an expectation of a flat-to to-negative revenue growth rate.
India Ratings expects that the liquidity profile of retailers will stretch from continuing margin contraction and revenue deterioration. With cash flow already negative, the credit metrics of retailers would remain under pressure. In India Ratings’ opinion, retailers’ inability to boost cash flows immediately and their high leverage levels may compel them to look for equity funding.
Working capital cycle would also remain under pressure during 2013 as new stores will generate returns only after 12-15 months and sales will remain slow at the existing stores. Inventory levels are likely to increase moderately in 2013 on account of slowing sales and new store openings that would require keeping higher inventory levels in 2013.
India Ratings opines that at present foreign direct investment (FDI) based equity infusion is a theoretical possibility. The agency expects existing Indian retailers to significantly restructure their businesses before receiving such investments given the complex requirements of the FDI-related guidelines (refer to India Ratings: FDI in Retail – Complexities to Undermine Benefits, published in September 2012). In the immediate future, equity from domestic investors may drive deleveraging of existing players. The proposed demerger of Pantaloon Retail India Limited (PRIL, ‘IND A-’/Stable) and the proposed acquisition of a controlling stake of the newly formed entity by Aditya Birla Nuvo Limited is a case in point.
The outlook could be revised to stable in the event of a sustained reduction in consumer price inflation, coupled with a rise in real wages, which would restore the discretionary spending power of Indian consumers. Alternately, a sudden spurt in government spending may have a temporary beneficial impact on private consumption, ultimately benefitting the sector. Companies in the sector that may be successfully able to attract equity investors, so as to deleverage their balance sheet significantly, are likely to improve their credit profiles.
Retail companies rated by India Ratings include Shoppers Stop Ltd (‘IND A1’), Pantaloon Retail (India) Ltd (‘IND A-’/Stable), Future Value Retail Limited (‘IND A-’/Stable), Tristar Retail (‘IND BB-’/Stable) and Blues Clothing Company Limited (‘IND BB+’/Stable
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