Indian retailers will continue to see liquidity pressure in 2009 due to slowing sales, margin pressures and poor economic conditions, Fitch Ratings said today.
''Slowing sales resulting in lower inventory turnover and increasing working capital requirements to fuel growth have resulted in liquidity pressures for many domestic retailers,'' said Fitch in a release.
Fitch expects financial positions of retailers to be under pressure in the current year due to factors emanating from the ongoing economic slowdown.
"Retailers are facing the heat of high leverage and already stretched balance sheets, due to the combination of debt led capex and capitalised lease rentals,'' it said.
In a bid to tap large organised retailing opportunity in the country, corporates such as Aditya Birla group, Reliance Industries among others have entered into retail sector and opened hundreds of stores across the country in the last 2-3 years. The organised retailing sector, which accounts for around 5 per cent of the estimated $350-billion Indian retail market, is expected to expand its share to 14-18 per cent of the total market by 2015, says a McKinsey report.
Food and grocery retailer Subhiksha, which runs nearly 1,600 stores, recently said its operations were at standstill due to shortage of liquidity. Subhiksha said it was working with the financial stakeholders, lenders and investors to inject liquidity and get the company back on track.
Fitch expects the liquidity pressure to continue during 2009 as inventory levels are expected to increase. "New stores will generate good run rates only after 12 to 15 months and sales will remain slow at the existing stores," it said.
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India's largest listed retailer Pantaloon Retail's same store growth in December fell 4 per cent in value segment, followed by 14 per cent drop in lifestyle retail segment and 10 per cent decline in home retail. These are the highest drops in same store growth in December month in the last four years.
"Across the board we are seeing lower numbers in same store growth than last year. Overall, there is a pressure on consumption which is impacting the retailers,'' said Priyamvada Balaji, an analyst with Fitch in a teleconference.
Fitch expects retailers’ free cash flows to remain negative during the current year, coupled with large short term debt maturities could also expose them to refinancing risks.
"Further, the rapid expansion in retail space in recent years was largely debt funded. This has resulted in substantial leverage at retailers during the last two to three years, which could add to their refinancing risks,'' it said.
Balaji said that the discounts and promotions by retailers are putting more pressure on their margins, though retailers are undertaking these measures to clear inventories and ease liquidity scenario for them, she said.
However, the fall in lease rentals, commodity prices and salaries have come as a comfort factor for the retailers during the troubled times. "They are renegotiating with property developers, suppliers and vendors to mitigate the impact of slowdown on their topline and margins. They are focussing a lot on what is best for supporting their margins,'' she said.
In terms of segments, the agency expects value retailing to be more resilient compared with other sections like lifestyle and home among others during the ongoing slowdown as shoppers are deferring discretionary spending.