New Goods & Services Tax regime will benefit brick & mortar retailers: Crisil

Our Bureau Mumbai | Updated on January 12, 2018 Published on May 30, 2017

Under the new GST rules, physical stores will be able to set off service tax on rent against taxes on goods.

Operating margins of retailers will improve by 100 bps in the next two fiscal years

As online retailers start to go slow on discounts to reduce cash burn and the benefits from the implementation of the new Goods & Services Tax (GST) begin to accrue, physical retailers will stand to benefit, according to a research note published by credit ratings agency Crisil.

The agency expects the operating margins of organised brick & mortar (B&M) retailers to improve by 100 basis points (bps) from about six per cent over next two fiscals.

Store expansion

Further, the pace of store expansion is also expected to increase over the medium-term, along with increasing store productivity, to cater to rising demand. Despite this, Crisil expects the credit profiles of its rated B&M retailers to remain steady, driven by better operating metrics and adequate debt metrics.

The agency said that it has outstanding ratings on 86 B&M retailers including 27 large (more than ₹500 crore revenue), 22 mid-sized (₹100-500 crore revenue) and 37 small ones.

“India’s top three online retailers lost more than ₹30 crore per day – or ₹11,000 crore in fiscal 2016 – because of large-scale discounts and aggressive marketing. Besides, the Department of Industrial Policy & Promotion (DIPP) regulation in March 2016, which restricts discounting and vendor concentration, has been favourable for B&M retailers. Consequently, online retailers have been gradually focussing on lowering share of discounts as well as losses, which has led to moderation in their growth,” the note added.

Under the new GST rules, physical stores will be able to set off service tax on rent against taxes on goods. With rent being one of their largest cost components, ranging between 5-6 per cent of sales, the retail sector stands to benefit. It will also gain from the rationalisation of logistics costs because of flexibility in procurement and seamless movement of goods facilitated by the implementation of GST.

Revenue growth to improve

Revenue growth of the organised B&M retail sector is expected to improve to 14-16 per cent annually in the next two fiscals compared with 13 per cent compounded annual growth rate seen between fiscals 2015 and 2017. As growth and profitability look up, Crisil said it expects capital expenditure of B&M retailers will increase by 15-20 per cent over the next two fiscals compared to capex incurred in the past two fiscals.

Anuj Sethi, Senior Director, Crisil Ratings, said in the note: “We see the profitability of B&M retailers improving as competitive intensity (from online rivals) moderates and service tax on rent gets set off in the GST regime.

“And as growth rises, so will revenue per square feet, which, in turn, will improve their fixed-cost absorption ability. That will provide at least 100 bps positive delta to operating margins for B&M retailers.”

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Published on May 30, 2017
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