Global ratings firm Fitch Ratings has revised the outlook for the Indian retail sector for the second half of this year from stable to negative, owing to a sustained fall in the discretionary spending ability of consumers, which, according to the firm, is unlikely to improve over the short term.
For 2012-13 and 2013-14, Fitch has revised its real gross domestic product growth forecast to 6.5 per cent and seven per cent from 7.5 per cent and eight per cent, respectively. The agency believes 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 growth, at its weakest in the last seven years in the first half this year, 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 the third quarter of 2011-12.
Fitch expects retailers to combat the slowing SSG growth by offering discounts. This would help boost volumes and consequently, overall revenue. However, this may also lead to erosion of gross margins, which retailers may counter by adopting cost rationalisation measures, as seen in the past. Nevertheless, pressure on operating margins is likely to remain, given a large part of these costs was fixed in nature, it said. The likely margin contraction and expansion plans, along with the increased need for inventory, as retailers open up new stores, would increase working capital requirements, which would be largely debt-funded.
However, companies have been implementing various strategies to contain debt, including raising equity and selling certain non-related assets and business segments, which may help maintain credit profiles. The inventory-holding period increased marginally in the first half this year, with a reduction in the credit period availed of 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, it stated. 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 benefit 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 have a positive impact on the capital structure and liquidity profile of companies in the sector.