IND-AS boost for retailers in Q1 even as consumption slowdown weighs

Excluding impact of new lease accounting norms, some companies witnessed a 90-340 basis point y-o-year contraction in EBITDA margin while gains were limited for others

Even as the overall consumption slowdown weighed on the performance of consumer players in June 2019 quarter (Q1), the new lease accounting standard (IND AS 116) helped many companies at the operating level. Restaurants, retailers or companies having store formats emerged as major beneficiaries in the consumer pack.

A study of 10 such listed companies shows that IND AS 116 propelled EBITDA (earnings before interest, tax, depreciation and amortisation) margin by a sharp 560 basis point (bp) on an aggregate level—the minimum gain being 90 bp, and the maximum being 1,070 bp. EBTIDA, too, got inflated by close to Rs 600 crore in Q1.

The new lease accounting standard that came into force from April 01, 2019, requires lessees (ones who use assets on lease basis) to recognise all the long-term lease contracts on balance sheets in the form of right-to-use assets and financial liabilities to pay rental dues. Companies are now needed to amortise the lease expenses pertaining to the current period and show it as interest expenses and depreciation rather than classifying (as rentals) under operating expenses as per the earlier practice. Thus, inflating the reported EBITDA in Q1.

Companies such as Shoppers Stop, Trent, Bata and Jubilant FoodWorks, among others, which have employed lease stores to run their businesses, saw a good EBITDA push in Q1 on account of IND AS 116. However, the overall impact at profit before tax level was insignificant in many cases.

Implications on individual companies varied depending upon lease contract, number and area of stores, etc. In absolute terms, Aditya Birla Fashion and Retail saw the highest benefit (from the select pack) with its EBITDA getting fuelled by Rs 172 crore due to the change in accounting, while Shoppers Stop saw the biggest gain in terms of EBITDA margin.

Notably, excluding IND AS 116 impact, the EBITDA margin of Titan, Page, V-Mart, Jubilant FoodWorks and Westlife Development would have contracted by 100-340 bp year-on-year, mainly due to unfavourable operating leverage, higher employee cost and discounts.

Going ahead though, some traction to overall business is expected with a likely improvement in consumption scenario. According to Priyank Chheda, analyst at Reliance Securities, the upcoming festive season and progress in monsoon, though some areas got impacted by flood, should help improve consumption spending and so the growth of retailers.

Titan, Avenue Supermart and Bata are among top picks of analysts in the retail space.