Portfolio

No quick bonanza for retail stocks from FDI

BHAVANA ACHARYA | Updated on March 12, 2018

Much debated, peppered with opposing arguments and strenuously protested, Foreign Direct Investment in Indian multi-brand retail has finally been allowed last week. Does this step translate into a bonanza for retail companies in the listed space? Market players certainly appeared to think so, with all stocks in the retail space recording hefty gains in the last two trading days of the week. Vishal Retail, Koutons Retail, Celebrity Fashions and Store One Retail surged 16 to 32 per cent. Meanwhile, Pantaloon Retail, CESC, Shoppers Stop and Trent moved up 10 to 31 per cent. The en masse gain in retail stocks has brushed aside factors such as size or nature of business. While opening up Indian retail could bring in long-term benefits for established players in the supermarket business, the euphoric mood that gripped retail stocks in the latter part of the week appears overdone.

Multi-brand retail primarily involves the sale of multiple brands across product segments. It could refer to supermarkets such as Big Bazaar or Reliance Fresh retailing groceries, farm products, and household and personal care goods. It could also refer to consumer durable chains such as Croma or Next. Single-brand retail refers to selling a single product under a single name internationally such as Burberry or Louis Vuitton.

100 per cent investment is now permitted in single-brand retail, up from the 51 per cent till now. The proposals allow foreign retailers to invest up to 51 per cent in the Indian multi-brand retail sector. Such investment should be at least $100 million, which consequently requires scale on part of the domestic retailer as well.

Further, at least half this investment should go towards building up back-end and supply chain infrastructure. Stores may be opened only in those cities with populations of over 1 million. The final key condition is that 30 per cent of manufactured products sold should have been sourced from small and medium enterprises.

Smaller players pushed up

Consider the top gainers. Many of them are not very serious contenders in the retail space. Store One Retail, for instance, has decided to discontinue its retail business. Vishal Retail had sold off its core retail business following debt troubles. It has only recently begun to operate a new chain store, the success of which is yet to be seen. Koutons Retail, also battling slowing sales and high debt, is set to follow Vishal's footsteps. Celebrity Fashions restructured business and is now a textile company.

Multi-brand retail would entail a ‘supermarket' kind of structure. However, players such as Provogue, Indian Terrain and Koutons Retail are primarily in apparel retail.

Potential beneficiaries

Some of the gainers in the pack, however, do have the required scale and ability to derive the benefit from foreign entry. Trent, for example, already has a back-end tie-up with Tesco. The company also has a hypermarket chain in Star Bazaar which operates mostly in bigger cities. It may thus meet the conditions stipulated for FDI, which is a presence in the largest cities.

Pantaloon Retail, among the biggest gainers, has its Big Bazaar chain of supermarkets besides E-Zone. The company is already authorised to raise up to Rs 1,500 crore in equity; its debt:equity was 2.2 times at end-June ‘11. . A successful tie-up with a foreign player could bring in the required capital to balance out the debt. Shoppers' Stop and CESC also have their own supermarket chains of HyperCITY and Spencer's.

Roadblocks

The surge in these stocks, therefore, is far more warranted than in the smaller players. Even so, such strong gains are unlikely to hold. For one, not all domestic retailers may be willing to cede stake to a foreign partner.

If they don't, they will have to face up to the prospect of greater competition from the new entrants with deeper pockets. Two, given the groundwork that will be required to scout for a partner, draw up an agreement, zero in on locations, get back-end and sourcing in place, and so on, it will take a few quarters at least. The actual effect can be seen only over a period of two years or more.

Three, since State government approvals are required to set up shop, the intentions of the retailer could be cut short by governments still seeking to protect the mom-and-pop stores in their States. Overall, in the short term at least, a deluge of capital is unlikely. Foreign retailers are reported to be waiting to read the fine-print before taking the plunge.

Published on November 26, 2011

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