BackMark to Market | Retail stocks in a reality gap
FDI move bodes well, but nothing has changed in terms of the business environment
Premium(Priyanka Parashar/Mint)
The standard analysis of the government’s move to allow foreign direct investment (FDI) in many sectors is that it would be beneficial in the long run. The same holds for retail as well with money coming in, rural incomes improving, consumption gaining manifold, employment opportunities expanding and so on. But there’s many a slip ‘twixt the cup and the lip.
What is going to happen when markets open on Monday? Remember, this is the second time the government has approved 51% FDI in multi-brand retail. The last time around in end-November, the decision stood for a couple of weeks before the government decided to defer its implementation, succumbing to pressure from allies.
But that episode does provide some clues. In the main, the decision to open up many sectors is positive for sentiment. After the government’s 24 November decision, stocks of Pantaloon Retail (India) Ltd climbed 30% in a couple of days. Although more sober, Trent Ltd’s scrip gained 9.5% while Shoppers Stop Ltd rose 12.2%. Brokerages expect a repeat of that feat. It would be the natural reaction to positive news flow, but one would be hard-pressed to describe it as a re-rating.
Just like the broader markets rallied in anticipation of a liquidity injection via US Federal Reserve chairman Ben Bernanke’s third round of quantitative easing, retails stocks too will climb up in hopes of equity injection from the Wal-Marts and Tescos. If the government hurries through and passes clear notifications on how it will implement the policy, that could bring in much-needed funds to the cash-strapped sector where expansion is halted.
For the established companies, what works is that “they have been around for some time and any foreign retailer would first look to tie-up with them", said Nitin Mathur, who tracks the consumer sector at Espirito Santo Securities Ltd.
Still, in terms of the business environment for retail companies, nothing has changed. If anything, things are worse than in November last year. As the June quarter corporate earnings and recent economic data show, there is a slowdown in sales as consumers cut back on discretionary spending.
Higher wages, increasing rents and interest are weighing down on organized retailers in India. Pantaloon, for example, reported a 77% decline in net profit for the June quarter from a year ago; Shoppers Stop made a consolidated loss owing much to its hypermarket unit. The debt levels of these companies also rose some 80% each at the end of March over a year ago.
Thus, earnings estimates have been slashed in recent times. If the money doesn’t hurry through, the earnings outlook for the next half-year doesn’t make for good reading.
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