Corporates www.indiaratings.co.in 24 January 2014 Retailing 2014 Outlook: Retail Sector Operational Efficiency Drags Sector from Trough Outlook Report Negative to Stable Outlook: India Ratings & Research (Ind-Ra) has revised its FY15 retail sector outlook to negative to stable from negative. Moderate single digit revenue growth and operational efficiencies translating into stable margins comparable to levels seen thus far in FY14 would result in marginal improvement in credit profile from FY13 levels for most retailers. Ratings Partly Reflect Risk: The agency has a Stable Outlook on most rated retail companies. Ind-Ra has factored in the benefits expected to accrue in revenue and operating profitability on account of the change in strategy to combat the challenging economic environment. Some companies with continued weak credit metrics also have Stable Outlooks in expectation of significant deleveraging. Consumption to Remain Subdued: Ind-Ra expects consumer sentiment to remain subdued in FY15 amid reduced affordability. Private final consumption expenditure (PFCE) of 2.2%, for the quarter ended September 2013, (quarter ended June 2013: 1.6%) was the second lowest growth observed in the last 37 quarters. While capex and industrial activity is expected to improve post 1HFY15 the subsequent real wage and urban consumption growth will likely be seen beyond FY15. Revenue Growth: Ind-Ra expects moderate space additions and stable growth from existing stores to help the sector’s overall median revenue grow 8%-10% in FY15. The growth would be tempered below the higher double digit growth witnessed in FY14 (1HFY14: 18.6%) on a lower base of FY13. FY13 posted a median growth of 14% on the back of lower GDP growth, persistently high inflation, spiralling interest rates and a decline in real incomes. The agency believes that - retailers with a diversified product portfolio (i.e. with a presence in the value and lifestyle segments) are more resilient to the ongoing economic pressures as compared to retailers focussed singularly on the premium and high-end luxury segments. Margin Pressures Contained: Ind-Ra expects moderate revenue growth and operational efficiencies to help maintain median EBITDA margins near FY14 levels. The ongoing efforts for driving operational efficiencies include measures such as changing the product mix, right-sizing stores, rationalising/closing down unviable stores, centralising back-end functions such finance, procurement and warehousing as well as closely monitoring cost structures. Less Pressure on Cash Flows: Ind-Ra expects the working capital cycle for FY15 to remain relatively better placed compared to the estimated FY14 levels largely due to lower inventory requirements and lease deposits on account of moderation in expansion plans. Stable operating profitability and lower working capital requirements are expected to reduce pressure on operating cash flows of most retailers. The agency however, expects the free cash flows to continue to remain negative in view of the impending moderate capex requirements. Credit Profile: With retailers preferring to moderate their pace of expansion, their overall credit profile in FY15 will likely improve from FY13 levels and be maintained around FY14 levels. Efforts by some players to contain leverage by monetising non-core businesses or infusing equity to deleverage balance sheet would be viewed as further positives. Rating Outlook S TABLE (2013 MID- YEAR : N EGATIVE ) (2013: N EGATIVE ) Sector Outlook N EGATIVE TO S TABLE (2013 MID- YEAR : NEGATIVE) (2013: N EGATIVE ) Negative Consumer Sentiment Persists Operational Efficiencies Benefit Margins Space Optimization Drives Growth Revenue Growth to Moderate Uncertainty in Foreign Direct Investment Related Research 2013 Mid-Year Outlook: Retail (July 2013) 2013 Outlook: Retail (January 2013) Other Outlooks Outlook 2014 Analysts Janhavi Prabhu +91 22 4000 1754 [email protected]Priyanka Poddar +91 22 4000 1752 [email protected]Shivani Mahajan +91 22 4000 1708 [email protected]
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Corporates
www.indiaratings.co.in 24 January 2014
Retailing
2014 Outlook: Retail Sector Operational Efficiency Drags Sector from Trough
Outlook Report
Negative to Stable Outlook: India Ratings & Research (Ind-Ra) has revised its FY15 retail
sector outlook to negative to stable from negative. Moderate single digit revenue growth and
operational efficiencies translating into stable margins comparable to levels seen thus far in
FY14 would result in marginal improvement in credit profile from FY13 levels for most retailers.
Ratings Partly Reflect Risk: The agency has a Stable Outlook on most rated retail
companies. Ind-Ra has factored in the benefits expected to accrue in revenue and operating
profitability on account of the change in strategy to combat the challenging economic
environment. Some companies with continued weak credit metrics also have Stable Outlooks
in expectation of significant deleveraging.
Consumption to Remain Subdued: Ind-Ra expects consumer sentiment to remain subdued
in FY15 amid reduced affordability. Private final consumption expenditure (PFCE) of 2.2%, for
the quarter ended September 2013, (quarter ended June 2013: 1.6%) was the second lowest
growth observed in the last 37 quarters. While capex and industrial activity is expected to
improve post 1HFY15 the subsequent real wage and urban consumption growth will likely be
seen beyond FY15.
Revenue Growth: Ind-Ra expects moderate space additions and stable growth from existing
stores to help the sector’s overall median revenue grow 8%-10% in FY15. The growth would be
tempered below the higher double digit growth witnessed in FY14 (1HFY14: 18.6%) on a lower
base of FY13. FY13 posted a median growth of 14% on the back of lower GDP growth,
persistently high inflation, spiralling interest rates and a decline in real incomes.
The agency believes that - retailers with a diversified product portfolio (i.e. with a presence in
the value and lifestyle segments) are more resilient to the ongoing economic pressures as
compared to retailers focussed singularly on the premium and high-end luxury segments.
Margin Pressures Contained: Ind-Ra expects moderate revenue growth and operational
efficiencies to help maintain median EBITDA margins near FY14 levels. The ongoing efforts for
driving operational efficiencies include measures such as changing the product mix, right-sizing
stores, rationalising/closing down unviable stores, centralising back-end functions such finance,
procurement and warehousing as well as closely monitoring cost structures.
Less Pressure on Cash Flows: Ind-Ra expects the working capital cycle for FY15 to remain
relatively better placed compared to the estimated FY14 levels largely due to lower inventory
requirements and lease deposits on account of moderation in expansion plans. Stable
operating profitability and lower working capital requirements are expected to reduce pressure
on operating cash flows of most retailers. The agency however, expects the free cash flows to
continue to remain negative in view of the impending moderate capex requirements.
Credit Profile: With retailers preferring to moderate their pace of expansion, their overall credit
profile in FY15 will likely improve from FY13 levels and be maintained around FY14 levels.
Efforts by some players to contain leverage by monetising non-core businesses or infusing
equity to deleverage balance sheet would be viewed as further positives.
Figure 13 Select India Ratings-Rated Retail Companies Issuer Long-term rating Outlook Short-term rating
Future Retail Ltd IND A- Stable IND A1 Shoppers Stop Ltd -- -- IND A1 Future Value Retail Limited IND A- Stable -- Takshila Retail Private Limited IND D -- --
Source: India Ratings
Corporates
2014 Outlook: Retail Sector
January 2014 11
Annex 3
Figure 14 Retail Companies Profile for FY13
FRL
(consolidated)ª SSL (consolidated) Trent
(consolidated) V-Mart
Presence cities 92.0 20.0 42.0 n.a. Formats Big Bazaar Departmental stores Westside Fashion Food Bazaar Hypercity Star Bazaar Kirana Central Mothercare Landmark KB Fair Price Crossroads Other sp
formats (Sisley)
Home Town MAC & Estee Lauder Other spec formats No of stores 317 PRIL Stores,
Debtor days 16 10 4 10 Inventory days 188 65 86 65 Creditor days 74 45 66 45 Net cash conversion cycle
130 30 31 30
n.a. – Not available ª FRL FY13 in CY13 ended Dec 2012 (18 months results). The leverage ratios for CY12 are excluding the Pantaloons format business on an annualised basis. The financial summary comprises the Pantaloons format business Source: India Ratings, company reports, Ace Equity
Corporates
2014 Outlook: Retail Sector
January 2014 12
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