Entry of global retailers to improve profitability of Indian retailers: Knight Frank

In the last 5 years, PAT has taken a severe beating due to high interest costs, real estate costs

The investments by international firms in Indian retailers could lower costs and improve profitability of  the latter, says a new report from Knight Frank.

Though operating profits of top Indian retailers grew at an annual rate of 34% in the last five years, the profitability measured by the profits after tax (PAT) had taken has taken a severe beating due to high interest costs and real estate costs, the study said.

The participation of foreign players can address this lacuna not just by bringing in investments, but also expertise and scale of operations that equip them to contain several cost components including real estate, it said. "Fresh investment in the sector would ease the capital constraints faced by most of the domestic players and there is a possibility of reduction in overall cost of capital," Knight Frank analysis said.

The entry of foreign retailers would help the entire sector by pushing unorganised retailers out of the sector, it said. "..It is likely that these unorganized players would move to a higher equilibrium level of efficiency in a medium to long term horizon. Since we expect robust GDP growth as projected in the 12th five year plan, the inefficient unorganized players are likely to be pushed out of retail market and get absorbed in other economic sectors," it said.

"There will be teething problems initially, but in the mid to long term horizon foreign participation will reap benefits for the Indian retail sector," it added.

Despite slump in the economic growth, the top three retailers in India--Pantaloon, Shoppers Stop and Trent-- have grown between 26 to 30% in the last five years.

Pantaloon Retail, Shoppers Stop and Trent have grown 30%, 27% and 26% respectively between 2007 to 2012, says the latest report by global property consultant Knight Frank.

"Increase in middle-class population and high disposable income led to heightened demand for the branded products in India. Taking cognizance of this, retailers expanded their business across the length and breadth of the country. This expansion fuelled the revenue growth of the retail companies, which witnessed an annual growth of 30% during 2007-12," Knight Frank said.

"However,the revenue growth momentum decelerated mainly due to financial crisis of 2008-09 which led retailers to slow down their expansion plan,"the report said.