Fitch: Indian Retailers Ramp Up Investment On Growth Hopes

Mumbai: According to a special report on the retail sector in India, Fitch Ratings, the international rating agency, says that the recent rapid growth in the sector has been driven by the country's economic fundamentals including a more favourable income distribution and increased consumption expenditure. Amit Tandon, managing director, Fitch Ratings, said that at this rate, the penetration of organised retail in India is expected to increase from an estimated three per cent in 2004 (about Rs280 billion) to around eight to 10 per cent over the next five years.

In the report, Fitch said that key players had continued to customise the concepts of their outlets to better service their target markets. Fitch expects strong topline growth across the industry including hypermarkets, department stores and supermarkets. However, the supermarket segment is likely to witness margin pressures, and the rapid scaling up of operations and promotion of in-store brands will be critical to profitability in that segment.

The report also notes that a combination of strengthened pricing power with suppliers, as well as investments in supply-chain infrastructure for the efficient sourcing and promotion of in-store brands is helping retailers enhance margins. Retailers are also expected to benefit from the increased availability of retail-focussed real estate as the rapid development of malls in the major cities is expected to continue in the medium-term.

Fitch notes that larger retailers have shown improved operational efficiencies and, hence, better financial performance and improved financial flexibility. Multiple means of financing are also opening up as the industry gains acceptance within the investor community. However, the industry as a whole remains in the investment phase, as scaling up continues to be the sector's key focus, and the rapid pace of expansion has resulted in negative free cash flows for most retailers.

From a rating perspective, Fitch believes that larger companies, like PRL and Shoppers' Stop, have gained the critical scale required to emerge as large, stable retailers in the future. Their ratings, however, are currently constrained by the industry being in its infancy; the pressure on cash flows, due to large investment plans of these companies, is likely to persist.

Also putting a check on near-term growth prospects for the sector are factors such as the still-poor industry status, lack of a uniform tax structure, increasing pressures on infrastructure in key consumer markets and the still-limited availability of quality real estate. However, the government has attempted to alleviate these pressures through regulatory changes (eg VAT legislation, FDI in construction) which are likely to boost the growth of this sector in the medium- to long-term.

Fitch believes that there is a continuing potential for strong growth in Indian retail, which is likely to translate into higher revenues for the existing players. Fitch expects this sector to see a substantial increase in competition, which could possibly shave down margins. Expansion, in the medium-term, is likely to be concentrated in the larger cities, though some 'tier II' cities are witnessing investments in organised retail.