Reflecting the general gloom in the economy, rating agency Fitch today downgraded the outlook for the domestic retail sector to "negative" from "stable".
"Outlook on the retail sector is revised to negative from stable. This is due to a sustained deterioration in discretionary spending, which is unlikely to improve over the short-term.
"The funding requirements of most retailers are likely to increase, driven by store expansions and possibly higher inventory-holding periods," the report said.
The worsening business conditions are likely to have a negative impact on credit profiles of retailers, it added.
Stating that private final consumption expenditure was the weakest in last seven years, the report said, "Private consumption is unlikely to improve despite a marginal improvement in second half, unless consumer price inflation comes down to a great extent and consumers receive significant raise in real wages."
The like-to-like sales growth of retailers has been muted so far this year and operators have had no choice but to opt for discount sales.
"The same-store sales growth has decelerated across lifestyle, as well as value-based formats. Retailers are likely to experience a greater erosion of gross margins, as they try to combat slower same-store growth by discounting.
"Therefore, the industry is likely to continue with discount schemes, which may generate volume at the cost of margins."
The Fitch report further said that inventory holding period has marginally increased, with a reduction in the credit period made available by creditors.
"The anticipated lower operating profitability, higher funding costs and working-capital requirements will probably continue to exert pressure on operating cash flows," it said.
The likely margin contraction, expansion plans, along with increased need for inventory as retailers open up new stores, will lead to increased cash flow needs which will be largely debt funded, the report said.
"However, companies have been adopting various strategies to contain the debt, including raising equity and via sale of certain unrelated assets as well as business segments, which may help in maintaining credit profiles," the agency said.
Liberalisation of the multi-brand segment could provide easier access to foreign direct investment and would have a positive impact on the capital structure and liquidity profile of companies, it added.
