India Ratings and Research (Ind-Ra) has maintained a "negative-to-stable" outlook for the retail sector for 2015-16 on account of expected moderation in domestic consumption growth.
"A fall in consumer inflation may provide a breather to consumers, cushioning a fall in consumer demand particularly for consumer non-durables," the rating agency said in a retail sector outlook.
"However, households may divert some of their surplus to savings against spending to resuscitate their balance sheets, given the current positive real interest rate environment," it said.
The outlook said rural spending is also likely to remain 'lukewarm' given the doubts on agriculture production due to weather conditions and a decline in the growth rate of both central and state government spending.
Ind-Ra expects the median revenue growth in the sector to taper down to a 'mid-single digit' for 2015-16 on lower volume growth and tepid same store sales growth.
In addition, intense competition from e-commerce remains a worry for the sector, the Ind-Ra outlook said.
"The high logistics cost at e-retailers and significant discounts offered by them, which is eating into their gross margins, will throw a challenge at the long-term sustainability of the model," it said.
"However till such time as online retailers secure capital, their onslaught may continue unabated," it added.
"Sector EBITDA margins are likely to be maintained for 2015-16 near 2014-15 levels, particularly by major players, due to improved operating efficiency and ability to contain costs," the outlook said.
Ind-Ra's study of the 1,000 largest Indian corporates suggested that wage growth lags corporate profitability by 12-18 months.
The rating agency believes that if the sector decides to chase aggressive revenue targets and acquire market share by resorting to longer discounting periods the upside to the margins could be limited over the medium term.
Further, the outlook said credit profile of retailers could remain weak in 2015-16 because of increasing interest burden due to their highly leveraged balance sheets to acquire quality retail space at prime locations.
