India Retail - Govt allows FDI in multi-brand retail - Religare

The Cabinet committee on Economic Affairs has approved upto 51% FDI in multi-brand retail. However given the statewise approvals required, we believe foreign retailers would go slow in terms of entering India. Though we remain negative on PF given the weak operating metrics, it would be the key beneficiary given its market leadership position. Other key listed retailers could also benefit by tying up in their nascent hypermarket business.

- Govt approves FDI in multi-brand retail: The Cabinet committee on Economic Affairs has approved upto 51% FDI in multi-brand retail (earlier approved by the Cabinet in November 2011, but rolled back due to stiff opposition). This paves the way for allowing foreign players to enter in multi-brand retail in India.

- State approval remains the key rider: Individual states will decide on the implementation of FDI in retail in their respective states which remains the key rider. Currently 9 states have approved the decision, whereas 6 states have expressed their reservations on the same. Given the statewise approvals required, we believe foreign retailers would go slow in terms of entering India. Most of the other conditions are similar to the ones which were approved by the cabinet earlier.

- Positive for producers and consumers, higher competition for mom-and-pop stores: Given the scale-up potential and capital intensity of the business, India could expect a steady inflow of FDI over a period, albeit the quantum would be small to begin with. Investments into supply chains (cold storage, logistics etc) would help build infrastructure back-end in India Potential lowering of prices as companies' source from farmers and remove distribution inefficiencies present today which would be positive for consumers. It would also entail more choices for the consumers. However this would lead to higher competition for mom-and-pop retailers (Currently India has ~12 mn unorganised retail network employing ~44 mn people).

- Positive for listed retail plays: Pantaloon Retail (PF IN, SELL rated) could be the key beneficiary given the market leadership in their Big Bazaar format which would make them an ideal partner for a foreign player to get scale in India straight away. Though there could be short-term bounce given sharp underperformance (down 45% in 1 year), we remain negative on the stock given weak operating metrics (SSS growth, inventory) and leveraged balance sheet. Trent Ltd (TRENT IN, Not rated) and Shoppers Stop (SHOP IN, HOLD rated) are the other key listed retailers which could benefit. Though we dont expect significant increase in competition or stake sale in their departmental store businesses, there is a potential to tie-up with foreign retailers in their nascent hypermarket businesses.

Source : Equity Bulls

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