Temper expectations from retail story

As the capital markets have given a thumbs up to the stocks of companies in retail business, it is time to do a soul searching as to whether the euphoria is justified or should expectations be tempered.

It is not only because many key states that have the potential for the entrants to ramp up business because of the high earning potential of their residents have opposed the move, at least initially. The experience of organised retail so far by big business houses with deep pockets has not been a runaway success, implying that neither the resources nor the model chosen is a recipe for guaranteed performance.

The Government of India has given its nod for the 51 per cent FDI in multi-brand retail. The government, which had made the policy announcement nearly a year ago but kept in abeyance its implementation as it waited to bring its political allies around, had to bite the bullet because of perceived image of policy paralysis afflicting it.

States hold the key

The ultimate call would have to be made by the state governments. While many of the Congress-ruled states have backed the move, several others like Tamil Nadu, Uttar Pradesh, Madhya Pradesh, Bihar, West Bengal etc have voiced their opposition. The decision has come with several riders- that they could be established only in cities with a population of more than 1 million people and 50 per cent of total FDI brought in will have to be invested in the `back-end infrastructure’ in three years. 

In a research report, Macquarie Capital Securities India (Pvt) Ltd, while terming the decision as positive for retailers as it would pave the way for capital flow, said it was “not a panacea for the sector”. The decision could not be viewed in isolation as several key reforms for the retail sector like implementation of the Model Agricultural Products Marketing Committee (APMC) Act and GST were yet to materialise.

The report said it was true that the first to be off the block would be the existing retail players who might gain by inducting foreign players. The global partners would be looking for an understanding of the Indian psyche and access to prime retail spots.

Lessons from Metro Cash & Carry

But the catch is how many of the existing big ticket retailers with deep pockets have performed following their entry. The report refers to the experience of METRO Cash & Carry and Reliance Retail in the Indian context. Global player METRO group was the first to introduce cash and carry concept in the country when it began operations in 2003 but it has just eight stores in India and the slow growth was because of several hurdles it had faced.

Macquarie report said Reliance Retail made an investment of $ 1.3 billion till FY 2011 against the expected investment in 2007 of $ 6 billion over 4-5 years. The number of stores was 1,050 and “the number of stores has come down after company closed several unviable stores”, the report said, and pointed out that the management team had witnessed the “third overhaul in the last 5 years” with a new team that was from Wal-Mart China.

The report said that FDI in multi-brand retail was expected to result in improvement in supply chain infrastructure and skill development, lead to better price realisation for the farmers and enable consumers get better produce at lower prices.

Growth drivers

But the key growth drivers for the sector would be the implementation of the Model Agricultural Products Marketing Committee Act and the GST. Apart from Reliance, Aditya Birla Group (under brand name ‘More’ and now a controlling stake in Pantaloon), M&M (Mon&Me), Bharti Airtel (Easyday format), Kishore Biyani’s Future Group (Big Bazaar chain) and RPG group (Spencer) are some of the corporate groups that have entered the retail space. Sahara Group has announced its intention to have a bite of the retail pie. The three prominent listed retailers are Pantaloon (a fashion format), Tata’s Trent and Shopper Stop. But they are trading at a high valuation.

Pantaloon retail had a total income of Rs 1149.78 crore in the quarter ending June 2012 (Rs 1049.67 crore) but the profit from ordinary activities was virtually flat at Rs 88.47 crore (Rs 80.93 crore). A high finance cost of  Rs 84.64 crore pulled the profit down to a mere Rs 3.83 crore before profit on sale of investment of Rs 258.97 crore resulted in a net profit of Rs  261.53 crore (Rs 19.07 crore).

Trent too had similar story to tell. Its June quarter earnings were Rs 218.70 crore (Rs 178.44 crore) and profit from operations was Rs 6.26 crore (Rs 43.67 lakh). It was the other income component of Rs 13.36 crore that helped it to end the quarter with a net profit of Rs 12.76 crore.  The EPS was Rs 4.68. Shopper’s Stop had a turnover of Rs 446.66 crore but its net profit was a mere Rs 50 lakh in the quarter ending June this year. The EPS was Re 0.06.

These retail stocks are however rather pricey. Shoppers Stop’s Rs 5 face value share closed on Monday at Rs 383.75 in the NSE giving it a P/E of 59. Trent closed at Rs 1135.50 (P/E of 63) and Pantaloon Retail’s Rs 2 face value share closed at Rs 187.70, giving it an astronomical P/E of 126! These shares have pared some gains today but these were marginal and investors should exercise caution in view of the long road ahead.

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