Fitch Ratings has downgraded its H2 2012 outlook for the Indian retail sector to negative.

This is due to a sustained deterioration in the 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 seven per cent from the earlier 7.5 per cent and eight 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 their capital structures.

The Private Final Consumption Expenditure (PFCE) growth rate, which was weakest in the last seven years in H1 2012, is unlikely to improve significantly unless consumer price inflation declines and consumers receive a significant raise in real wages.

Same-store sales growth

The same-store sales growth 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, 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 the debt, including raising equity and selling certain non-related assets and business segments, which may help in maintaining credit profiles.

The inventory holding period increased by a marginal extent in H1 2012, 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.

>shanker.s@thehindu.co.in

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