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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.‎

Tags: Dilipp S Nag, Fitch, Fitch Ratings, gdp, India, Lifestyle, Rapaport, retail, Retail Sector
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