Most retailers to continue with negative cashflows in 2011
Cash conversion cycles of Indian retailers such as Pantaloon, Trent and Next Retail remain high despite the drop in the cycle between 2007 and 2010, says a new report from ratings firm Fitch Ratings.
Cash conversion cycle measures the time between outlay of cash and cash recovery by a retailer and lower cycle reflects better cashflows from operations.
While cash conversion cycle of Pantaloon, the country’s largest retailer, has come down from 125 days in 2007 to 95 days in 2010, Videocon Group’s Next Retail saw a drop from 165 days to 130 days in 2010.
Trent, the retail arm of Tatas witnessed a drop from 80 days to 70 days, Fitch said in ‘Retailing India Outlook Report’.
Significantly, Shoppers Stop achieved a decline from 30 days in 2007 to -10 days due to better inventory management, Fitch said.
Retailers have shut or relocated loss-making stores, brought down operating expenses, renegotiated lease rents with developers to save cash during the economic slowdown of 2008-09 and improve profitability.
In 2011, Fitch believes that the ongoing inventory management will reduce overall cash conversion cycles. It expects retailers to adopt measures such as increasing the proportion of bought-out sales (where inventory is held on vendors books while being physically on shop floor), increased use of franchise stores and streamlining supply chain operations.
“As companies expand, they will be able to negotiate better terms with creditors due to their larger scale, which will improve overall liquidity,” Fitch analysts Janhavi Prabhu and Tahera Kachwalla said.
In addition, over supply of retail space, 21 million sq ft between 2011-12, should allow retailers to negotiate lower deposits with developers, resulting in further improvement in liquidity, they said.
However, the agency expects most retailers, except Shoppers Stop, to continue with negative cashflows from operations in 2011 due to high working capital requirements.
“Shoppers Stop is likely to have positive cash flow from operations as well as positive cash flows due to better working capital management, and a slower pace of expansion,” the analysts said.
“However, in the longer term, as the pace of expansion moderates and working capital improvements materialise, more companies turn cash flow positive,” they added.
