Fitch Ratings revised the Indian Retail Sector Outlook for the second half 2012-13 to Negative

Fitch Ratings revised theFitch Ratings revised the Indian retail sector outlook for the second half of the financial year 2012-13 to negative from stable in the backdrop of a decline in the discretionary spending ability. Fitch has revised down its real GDP forecasts to 6.5% and 7.0% for 2013 and 2014 respectively from the earlier 7.5% and 8.0%. The downward revision was attributed to sluggish demand, high construction costs and liquidity pressures. The worsening business conditions are likely to negatively impact credit profiles. The impact on individual retailers however depends on their ability to manage their capital structures.

According to the rating agency the Private Final Consumption Expenditure (PFCE) growth rate, which was weakest in the last seven years in the first six months of 2012, cannot be expected to improve significantly unless consumer price inflation dips and consumers receive a significant raise in real wages.

The agency stated that RBI's caution on interest rate cuts and high EMIs continue to be a deterrent for potential home buyers. The general slowdown and subdued job growth in the IT sector, which was at its lowest quarterly level so far is likely to hold back demand for commercial and retail properties. Real estate companies will continue to face margin compression from high construction costs for both building materials and labour.

Assumptions

Fitch assumes that retailers will combat slowing SSG across format (lifestyle and value) by offering discounts, which in turn would help boost volumes and consequently overall revenue. However, this may lead to an erosion of gross margins.

Margin contraction, expansion plans as well as the need for inventory as retailers open up new stores, will increase working capital requirements which will be largely debt-funded.
Companies, were however observed to be implementing various strategies to contain the debt, including raising equity and selling certain non-related assets and business segments to help in the maintenance of credit profiles.