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Fitch Downgrades India's Retail Sector
Aug 8, 2012 4:40 AM
By Dilipp S Nag
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RAPAPORT... Fitch Ratings downgraded its outlook for the Indian retail sector to “negative” from “stable” for the second half of 2012. The agency reasoned that the recent sustained deterioration in discretionary spending is unlikely to improve over the short term.
Same-store sales growth (SSG) of retailers decelerated across the lifestyle and value-based formats in July 2012 and Fitch expects retailers to attempt to boost turnover and revenue by raising their discount offerings.
However, this may lead to an erosion of gross margins, which retailers may counter by adopting cost-rationalization measures, Fitch said. The pressures on operating margins are likely to remain high given that a large part of these costs are fixed in nature, it noted.
Fitch also stated that the likely margin contraction, expansion plans and increased need for inventory as retailers open new stores, will increase their working capital requirements, which will largely be funded through debt. In order to contain their debt levels, companies have implemented various strategies, including raising equity and selling certain non-related assets and business segments.
Fitch noted that retailers’ inventory holding period increased by a marginal extent in the first half of 2012, with a reduction in available credit from lenders. Lower operating profitability as well as higher funding costs and working capital requirements should continue to exert pressure on operating cash flow, the agency added.
Fitch revised its real gross domestic product (GDP) forecast for fiscal 2013 to a 6.5 percent rate of growth, from 7.5 percent. The agency noted that worsening business conditions could negatively impact credit profiles, while the impact on individual retailers would depend on their ability to manage their capital structures.
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Tags:
Dilipp S Nag, Fitch, Fitch Ratings, gdp, India, Lifestyle, Rapaport, retail, Retail Sector
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