RETAIL Outlook Remains Negative - India Ratings

Mumbai, July 12, 2013: India Ratings & Research (Ind-Ra) has maintained a negative outlook on the retail sector for H213. The expected continuation of negative real wage growth and weakening of household finances may further pressurise consumer spending in the next six to 12 months.

While retailers are streamlining operations to reduce costs, the continuation of discounts is expected to drive down margins.

On the capex front, the retailers are looking at profitable and moderate pace of additions (under 10%) in FY14 as against the range of 15%-30% seen in the last two-three years. The agency expects this pace of additions to be maintained to help reduce major capex outgo. Lately, companies are closing, relocating or rationalising unprofitable stores.

Hurdles in attracting foreign direct investment (FDI) in multi-brand retail have increased. 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. Foreign investors may additionally face a regulatory or reputation risk in their home jurisdictions.

Ind-Ra expects estimated lower operating profitability, higher funding costs and working-capital requirements to continue to exert pressure on operating cash flows. In FY14, even though capex is expected to be lower, meaningful deleveraging is unlikely to occur. While some players may resort to asset sales to reduce absolute debt levels, the commensurate reduction in cash flows from these assets, may provide limited, if any, benefit to credit profile.

A sustained reduction in CPI, coupled with healthy kharif productivity may benefit consumer spending in Q414. Alternately, a sudden spurt in government spending may have a temporary beneficial impact on private consumption, ultimately benefitting the sector. However, companies which may successfully be able to attract equity investors, so as to deleverage their balance sheet significantly are likely to improve their credit profile.

Ind-Ra-rated retailers are Future Retail Limited (‘IND A-’/Stable), Future Value Retail Limited (‘IND A-’/Stable), Shoppers Stop Limited (‘IND A1’), Tristar Retail Limited (‘IND BB-’/Stable) and Blues Clothing Company Limited (‘IND BB+’/Stable).

(Source: Manager – Corporate Communications and Investor Relations, India Ratings & Research -A Fitch Group Company.)