Foreign direct investment (FDI) in multi-brand retail will stimulate gradual investment in Indian retail according to CRISIL. The analytical and ratings company estimates FDI inflows of USD 2.5–3.0 bn over the next five years, modest in the context of overall FDI inflows of USD 160 bn in India over the past five years.
According to CRISIL, the food and grocery (F&G) vertical would attract a larger share of the likely FDI inflows. The clause specifying 50 percent investment in back-end infrastructure especially aligns with the commercial requirement in the F&G segment. F&G accounts for two-thirds of Indian retail sales, but currently has organized retail sales of only around 2 percent, the lowest among retail verticals.
Ajay D’Souza, Head – CRISIL Research, said, "To improve profitability in the F&G segment, retailers need to control their supply chain costs and build scale. Every percentage point reduction in supply chain cost and resultant gain in EBITDA margin can improve equity IRR of an F&G store by 250-300 basis points. Foreign retailers, with their access to capital and technology, are well placed to leverage this opportunity.”
Considering the likely supply of quality retail space and current ORP (organised retail penetration) in large cities, CRISIL believes that ORP will still remain moderate, reaching about 11 percent by 2015-16 from the current 6.5 percent. The lead time to identify appropriate store locations and address issues in rolling out back-end infrastructure will also limit pace of growth in ORP.
The cabinet decision allowing 51 percent FDI in multi-brand retail and 100 percent FDI in single-brand retail is likely to catalyze joint ventures (JVs) between Indian and foreign organized retailers. Depending on whether they buy into existing retail chains or set up new JVs, the share of foreign retailers in multi-brand organized retail will remain moderate and is expected to vary between 10-20 percent by 2015-16.
Comparatively, in China, where organized retail accounts for 20-25 percent of total retail sales, foreign retailers have a market share of 25-30 percent in organized retail, built over the past 15 years since FDI in retail was opened up. The FDI proposal offers good prospects for large established Indian retailers. FDI would enable these players attract capital for driving their expansion plans and in addition, benefit from scale, cost efficiencies and technology brought in by foreign retailers.
Anuj Sethi, Head, CRISIL Ratings, said that the aggressive growth plans of leading Indian retailers, which were under pressure due to increasing debt stock and moderation in customer footfalls in the current year, will get a strong boost from the availability of capital. However, for smaller and regional retailers, scale of operations and control over costs will determine their ability to weather pressures of aggressive expansions by large retailers.
CRISIL is a global analytical company providing ratings, research, and risk and policy advisory services. It is also counted as India’s leading ratings agency.
-IndiaRetailing Bureau
