Fitch downgrades H2 outlook for retail sector

Our Bureau Mumbai | Updated on November 16, 2017 Published on August 09, 2012

Fitch Ratings has downgraded its H2-12 outlook for the Indian retail sector to negative. This follows the sustained deterioration in discretionary spending ability, which is unlikely to improve over the short term. Fitch has revised down its real GDP forecasts to 6.5 per cent and 7 per cent from the earlier 7.5 per cent and 8 per cent in FY13 and FY14.

The rating agency believes that the worsening business conditions could negatively impact credit profiles, while the impact on individual retailers would depend on their ability to manage capital structures.

The private final consumption expenditure (PFCE) growth rate, which was weakest in the last seven years in H1-12, is unlikely to improve significantly unless consumer price inflation falls and consumers get a big hike in real wages, it said.

The same-store sales growth (SSG) of retailers has decelerated across lifestyle and value-based formats. Fitch expects retailers to combat slowing SSG across format (lifestyle and value) by offering discounts, which in turn would help boost volumes and consequently overall revenue. However, this may lead to an erosion of gross margins.

The likely margin contraction and expansion plans, along with increased need for inventory as retailers open up new stores, will increase working capital requirements which will be largely debt-funded. However, companies have been implementing various strategies to contain debt, including raising equity and selling certain non-related assets and business segments, which may help maintain credit profiles.

The inventory holding period increased by a marginal extent in H1-12, with a reduction in the credit period availed from creditors. The expected lower operating profitability as well as higher funding costs and working capital requirements should continue to exert pressure on operating cash flows, it added.


Published on August 09, 2012
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