Mumbai: Rising prices have forced consumers to reduce discretionary spends, crimping revenues of retailers in the quarter ended 30 June. With inflation refusing to moderate, and rising rentals and interest rates increasing expenses of retailers, the industry will experience short-term pain, analysts say.
Retail chains, including Shoppers Stop Ltd, Trent Ltd and Pantaloon Retail India Ltd, the nation’s largest publicly traded retailer, have a similar story to tell.
“We saw volume contraction during the just concluded quarter, signalling that the growth momentum has slowed down,” said Sangeeta Tripathi. senior equity research analyst at ShareKhan Ltd. “There will be another one or two quarters of moderation in revenue for retailers and by then people will readjust their spends, making our views for the long-term bullish but short-term pain.”
Inflation in the world’s second-fastest growing economy has remained above 9% since the beginning of December, eroding the spending power of consumers.
Purchases of high-value items such as furniture and apparel have already been affected as people spend more on basic items such as food and transport. At Shoppers Stop, volumes shrunk 5% in the quarter ended 30 June.
“Discretionary, big-ticket spends have slowed down and the year-on-year growth for the next six months will be lower,” said Sameer Narang, an analyst at HDFC Securities Ltd. He expects the outlook for fiscal 2013 to be better.
Apparel sales were also impacted by high cotton prices and an increase in excise duty, forcing retailers to raise prices by as much as 20%.
For Kishore Biyani-controlled Pantaloon Retail, which reported its full year and fourth quarter earnings below analysts’ expectations on Thursday, it was a double whammy. Besides seeing a slowdown in revenue growth, the company was also impacted by rising interest costs to service its Rs 4,350 crore debt. Interest costs rose to Rs 610 crore in the year ended 30 June from Rs.490 crore a year earlier.
“Revenues were below our expectations by 8% but higher- than-expected margins (by 36 basis points) led to operating margins coming in only 2% below expectations,” Ambit Capital Pvt. Ltd said in a 26 August report. “However, higher-than-expected interest expenses (by 17%) meant PBT and PAT came in behind our expectations by around 23%.” One basis point is 0.01%.
To add to the woes of the sector, rental costs have also increased over the past year. Even as the country saw the addition of 6 million square feet of organized retail mall space in the first half of 2011, overall rental values in malls have witnessed an increase, CB Richard Ellis Group said in a 16 August report.
For instance, rentals at malls in Saket and Vasant Kunj in south Delhi increased 9-12% in the first six months of 2011 from a year earlier.
In Gurgaon, rentals rose 15-16% whereas in central Mumbai it increased 18-20%, primarily on account of high demand and low supply of quality space, said the study.
Pantaloon Retail, which added 2.26 million sq. ft of retail space during the fiscal 2011, booked over 9 million sq. ft of retail space for its future expansion, the firm said in a statement.
The retailer expects a scarcity of retail space in the future and believes that the booking of retail space will provide it a significant competitive advantage in the near future. Likewise, Shoppers Stop, which has over 40 departmental stores, has already booked properties for the next three years.
Govind Shrikhande, managing director at Shoppers Stop, expects sales to pick up in the coming festive season.
Pantaloon Retail lost 0.9% to close at Rs 272.1 on Friday on the Bombay Stock Exchange. Trent Ltd lost 3.7% to Rs 1,056.65 and Shoppers Stop shed 4.5% to Rs 375. In comparison, the exchange’s benchmark Sensex declined 1.84%. From their 52 week highs, Pantaloon Retail lost 49.85%, Trent lost 26% and Shoppers Stop lost 25.6%.
Ashwin Ramarathinam contributed to this story.