Indian retail sector outlook in 2012 stable: Fitch

Ratings agency Fitch has assigned a stable outlook to the retail sector for 2012 as factors such as expected sales growth-driven expansion and efficient working capital management are likely to benefit retail companies.

Despite the economic downturn, Fitch expects the food and value segments to provide a defensive play.

"There are likely to be economic headwinds which would impact Indian retailers. However, sales growth driven by space additions and inflation, stable margins, efficient working capital management and flexibility to defer or tone down expansion plans are expected to result in a stable credit profile for Fitch-rated retail companies," Fitch said.

According to the '2012 Outlook:India Retail' report, consumer discretionary income is likely to be lower due to higher inflation and interest rates.

"However, inflation provides a direct fillip to same-store sales growth. Growth will also be helped by capital expenditure undertaken by retailers," it said.

During the year, margins for most retailers are likely to remain stable.

"Fitch expects margin pressures created by extended discounting periods to push volumes growth, to be mitigated by measures such as recent price hikes and softening in raw material prices [mainly cotton]," it said.

Improvements in operating cost structure (rentals) and increasing the proportion of private labels would also contribute to margins.

Fitch expects most retailers to generate negative cash flow from their operations in 2012. However, the deficit is expected to be lower compared to previous years, backed by stable margins and slightly improved working capital management.

"In 2011, most companies tied up additional space requirements for the next two to three years, citing lower availability of space in strategic locations, resulting in a higher outflow on account of lease deposits," it said.

The outlook could be revised to negative if economic conditions worsen, affecting revenue growth, leading to margin contraction and adversely impacting retailers' cash flow, Fitch added.

The agency also does not expect any positive triggers in the immediate term for the sector.

Commenting on allowing more FDI into the sector, Fitch said: "If and when foreign direct investment [FDI] is allowed, it would benefit Indian retailers over the next two to three years."

The size of India's retail sector is currently estimated at around $450 billion and organised retail accounts for around 5% of the total market.