Domestic retail players will see capital inflows only over a period of time.
After much debate, the retail sector is finally liberalised. Foreign retail chains will now be able to own up to 51 per cent in India’s retail companies. In anticipation, retail stocks have already been rallying since mid-November. A day after the Cabinet gave its nod for 51 per cent foreign investment in multi-brand retail chains, analysts are saying the impact will not be significant in the short term. While this will bring in fresh capital to some of the players in the industry, it surely is not a magic wand that will change the fortunes of listed entities overnight.
Several companies in the sector are faced with challenges of high debt, high inventory and slow generation of free cash flows. According to Prabhudas Lilladher, any deal and fund infusion will take at least 6-12 months to materialise. Analysts Kishore Biyani’s Pantaloon Retail would be the biggest beneficiary of this development, as it’s the single largest organised retailer in India, with 15 million sq ft of operational space. Analysts add that with a core retail debt of Rs 4,500 crore and 120 days of inventory, the company’s fortunes would substantially improve if a foreign retailer was to infuse capital in the company. Pantaloon could also consider divesting in different formats that it currently operates. This would help the company raise the much-needed funds it requires to reduce debt.
Another big player in the segment is Shopper’s Stop. However, analysts believe the stock will not benefit substantially from this, as its large format Hypercity stores lack scale and the standalone balance sheet of Shopper’s Stop is cash-flow positive and is not in dire need of fund infusion.
Some analysts are bullish on companies that own retail assets, as relaxation in regulations will mean more brands coming to India. This would have a positive rub-off on rentals. According to Edelweiss Financial Services, the increase in the number of brands in India will give retail asset owners a larger addressable market size, enhancing their bargaining power, which will eventually reflect in higher rentals or higher asset values. Phoenix Mills, at pole position, stands to benefit the most from improving demand in the sector. However, the market is keenly awaiting a formal note with all the riders from the government.