FDI in retail: Which stocks to bet on?
Nachiket Kelkar
Retail stocks surged 10-20% on Friday as the market cheered the government’s decision to allow 51% foreign direct investment [FDI] in multi-brand retail and 100% FDI in single-brand retail. Pantaloon Retail gained the most, up 17% in morning trade. But is it really a good time to buy retail stocks?
Most retail stocks have been hammered this year, weighed down by ballooning debts, slowing sales and lack of clarity on FDI till now. Since April, shares of Pantaloon, Koutons and Vishal Retail have fallen between 30-37%.
Opening the doors for 51% FDI in multi-brand retail will give a big fillip to domestic retailers, as it will help them pare debt and scale up operations.
Pantaloon Retail had a debt of over Rs 4,000 crore as of June. Koutons Retail and Vishal Retail too have debts of around Rs 700 crore each.
"The decision to open the retail sector’s doors has come at the right time when global players, facing headwinds in their home countries, are scouting for new markets and domestic players, on the other hand, are strangulated by piling debt," say Abneesh Roy and Harsh Mehta of Edelweiss Securities.
The analysts feel the move will benefit Pantaloon the most as it will help trim debt and enable it to continue expansion. It will also help Tata’s retail venture Trent as it has and continues to seek tie ups with global retailers who are eagerly waiting to enter India. Other companies like Reliance Retail, CESC , which owns the retail chain Spencers, Aditya Birla Retail and Koutons among others too stand to gain.
Pantaloon Retail has had talks with French giant Carrefour and WalMart, the world’s biggest supermarket operator. Among other retailers like Bharti could extend its back-end alliance with WalMart to the front-end and Trent may expand its relationship with Britain’s Tesco, possibly for a front-end joint venture, analysts say.
"Cabinet approval is a step in the right direction to open up the retail sector to international players…The policy will give an opportunity to established domestic retail players to unlock value given that they have an established front-end system and more importantly a presence in prominent real estate locations," say Manoj Menon and Amrita Basu of Kotak Institutional Equities.
However, the cabinet approval is only the first step, and doesn’t mean that FDI will flow into the sector overnight. Opposition parties like the BJP and the Left Front, and even some of the Congress’ coalition partners have long opposed opening up the retail sector, saying that such a move would kill the mom and pop stores spread across the country and leave many people jobless. So the government may have opened the door to FDI in retail, the road remains bumpy.
"…we don’t expect it to change the fortunes of Indian retail sector in short-term. At best, we believe, this will provide a sentiment boost to Indian retail stocks in the near-term. We don’t expect material fund infusion/deals to happen immediately," says Gautam Duggad of Prabhudas Lilladher.
Analysts are bullish on the long-term prospects of the sector in India, and feel opening the doors for FDI will boost retail stocks. However, the material benefits from FDI are only expected to flow over the next several years.
Angel Broking estimates India’s organised retail market to be worth USD 28 billion at present and sees it nine-times bigger by 2020. Edelweiss Securities says share of modern retail for consumer companies will jump to over 20% by 2020 from current 8%.
In the near future though, analysts warn there are other issues, especially slowdown in sales, which will weigh.
Pantaloon Retail's July-September same-store-sales growth in lifestyle and value retail segments, for instance, was slowest in last 13 quarters. Same-store-sales measure, sales at stores open for at least one year. Shoppers Stop too is expecting only a high-single digit sales growth this year.
This slowing same-store-sales growth will be a near-term challenge and cap any major upside, says Prabhudas Lilladher’s Duggad.
At 11:30 hrs, among some of the retail stocks, Pantaloon Retail was trading up 15.6% at Rs 232.60 on NSE. Trent was up 10.3% at Rs 1,074.10, Shoppers Stop was up 11.1% at Rs 413.80, Koutons was up 12.6% at Rs 24.60 and Vishal Retail was up 20% at Rs 22.70.
Most retail stocks have been hammered this year, weighed down by ballooning debts, slowing sales and lack of clarity on FDI till now. Since April, shares of Pantaloon, Koutons and Vishal Retail have fallen between 30-37%.
Opening the doors for 51% FDI in multi-brand retail will give a big fillip to domestic retailers, as it will help them pare debt and scale up operations.
Pantaloon Retail had a debt of over Rs 4,000 crore as of June. Koutons Retail and Vishal Retail too have debts of around Rs 700 crore each.
"The decision to open the retail sector’s doors has come at the right time when global players, facing headwinds in their home countries, are scouting for new markets and domestic players, on the other hand, are strangulated by piling debt," say Abneesh Roy and Harsh Mehta of Edelweiss Securities.
The analysts feel the move will benefit Pantaloon the most as it will help trim debt and enable it to continue expansion. It will also help Tata’s retail venture Trent as it has and continues to seek tie ups with global retailers who are eagerly waiting to enter India. Other companies like Reliance Retail, CESC , which owns the retail chain Spencers, Aditya Birla Retail and Koutons among others too stand to gain.
Pantaloon Retail has had talks with French giant Carrefour and WalMart, the world’s biggest supermarket operator. Among other retailers like Bharti could extend its back-end alliance with WalMart to the front-end and Trent may expand its relationship with Britain’s Tesco, possibly for a front-end joint venture, analysts say.
"Cabinet approval is a step in the right direction to open up the retail sector to international players…The policy will give an opportunity to established domestic retail players to unlock value given that they have an established front-end system and more importantly a presence in prominent real estate locations," say Manoj Menon and Amrita Basu of Kotak Institutional Equities.
However, the cabinet approval is only the first step, and doesn’t mean that FDI will flow into the sector overnight. Opposition parties like the BJP and the Left Front, and even some of the Congress’ coalition partners have long opposed opening up the retail sector, saying that such a move would kill the mom and pop stores spread across the country and leave many people jobless. So the government may have opened the door to FDI in retail, the road remains bumpy.
"…we don’t expect it to change the fortunes of Indian retail sector in short-term. At best, we believe, this will provide a sentiment boost to Indian retail stocks in the near-term. We don’t expect material fund infusion/deals to happen immediately," says Gautam Duggad of Prabhudas Lilladher.
Analysts are bullish on the long-term prospects of the sector in India, and feel opening the doors for FDI will boost retail stocks. However, the material benefits from FDI are only expected to flow over the next several years.
Angel Broking estimates India’s organised retail market to be worth USD 28 billion at present and sees it nine-times bigger by 2020. Edelweiss Securities says share of modern retail for consumer companies will jump to over 20% by 2020 from current 8%.
In the near future though, analysts warn there are other issues, especially slowdown in sales, which will weigh.
Pantaloon Retail's July-September same-store-sales growth in lifestyle and value retail segments, for instance, was slowest in last 13 quarters. Same-store-sales measure, sales at stores open for at least one year. Shoppers Stop too is expecting only a high-single digit sales growth this year.
This slowing same-store-sales growth will be a near-term challenge and cap any major upside, says Prabhudas Lilladher’s Duggad.
At 11:30 hrs, among some of the retail stocks, Pantaloon Retail was trading up 15.6% at Rs 232.60 on NSE. Trent was up 10.3% at Rs 1,074.10, Shoppers Stop was up 11.1% at Rs 413.80, Koutons was up 12.6% at Rs 24.60 and Vishal Retail was up 20% at Rs 22.70.
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