India Ratings has maintained a "negative outlook" for the retail sector with 'luxury segment' expected to be the worst hit in 2013.
"India Ratings has maintained a negative outlook on the retail sector for 2013. This is because of protracted weakness in consumer's discretionary spending due to higher inflation, marginal real wage growth and low level of macro-economic activity," the agency said in its report released today.
Observing that the retail sector registered a single digit growth in 2012 for the first time in the history, the report said "overall revenue is likely to grow at 3.0 per cent- 8.0 per cent year-on-year across large retailer."
Sales in 2012 were driven by discount offers by companies and the trend is likely to continue in 2013, it said, adding "retailers focused on the luxury or premium segment may be worst hit."
Stating that the working capital requirements may increase due to lower inventory turnover for companies, the report said "the industry's working capital cycle shortened in financial year 2012 due to heavy discount driven sales adopted by the retailers."
"A sustained reduction in consumer price inflation, coupled with rise in wages is likely to restore the discretionary spending of power of consumers. Government spending may also have a temporary beneficial (to the industry)," it said on the outlook for the industry.
Stating that the agency expects the retail sector to remain 'negative', the report said liberalisation of FDI in multi-brand retail could have a positive impact on the retail sector.
Speaking with reporters in Mumbai, India Ratings director Deep Mukherjee said the agency is not expecting much activity in regards to equity infusion through foreign direct investment (FDI) route.
"At present, FDI-based equity infusion is a theoretical possibility given the complex government requirements, the existing retailers may have to significantly restructure their businesses before receiving such investments," he said.
On the short term, however, the agency has revised the outlook to be stable in the event of a sustained reduction in consumer price inflation, coupled with a rise in real wages, which would restore the discretionary spending power of consumers.
"Alternately, a sudden spurt in government spending may have a temporary beneficial impact on private consumption, ultimately benefitting the sector. Companies in the sector that may be successfully able to attract equity investors, so as to deleverage their balance sheet significantly, are likely to improve their credit profiles," he added.
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