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Indian retail Q3 results’ takeaways

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After most of the public listed retail companies disclosed their quarterly results for the quarter ended December 31, 2008, a slowdown in revenue momentum was visible even in the festive quarter on account of marked dip in footfalls. Industry reports peg mall footfall decline at 25 per cent. Same store sales (SSS) growth dipped sharply and turned negative for many retailers. Industry sources also claim that revenue per square feet also dipped for most retailers. No wonder, massive inventory liquidation efforts were evident with rampant discounts and promotions. Scarcity of capital and over dependence on debt funding adversely impacted the margins and scaled down expansion plans.

Leverage at dizzy levels
Almost all companies are highly leveraged and have little scope for taking further debts. Even companies like Shoppers Stop, which have historically always stayed below debt/equity (D/E) of 1:1, are now above that mark and have seen a downgrade of their debt ratings. Some others like Vishal Retail, at D/E of 2.6:1, have limited scope to borrow further. With high borrowing rates in the quarter, heavy interest burden has adversely impacted PAT expansion.

Expansion plans
Across the board expansion plans are being re-looked at because of capital scarcity and catchment reassessment. Given high debt levels and dormant equity market, capital for growth has become scarce. Developers are, therefore, scaling down or postponing many mall projects due to funding constraints. Additionally, with catchments turning unviable, rampant store closures and format rationalisation is also on the cards.

Industry experts believe that the next few quarters will test the resilience of retailers’ business models and operational efficiency. Further they reiterate that revenue growth will be the key focus with retailers battling to get footfalls. Cost savings from cheaper inputs, lower rentals and cheaper procurement will emerge. Also, the experts feel that retailers who can continue to attract consumers with attractive discounts and maintain efficiencies in the system will be better off. It is believed that value retailers with presence across consumption categories will fare better.

With footfalls falling close to 20 per cent in malls across the country, new stores added in the current year are bound to take longer to break-even. This puts the burden of maintaining profitability on the older stores, which is why companies will be looking at improving the older store growth numbers, going forward.

Revenue growth

(INR mn)Dec-08 Dec-07 % growth
Pantaloon Retail15,25712,26824.4
Shoppers Stop3,6263,26611.0
Koutons Retail2,4181,73139.7
Titan Inds10,2408,02427.6
Vishal Retail3,5553,01717.8

Margin improvement better–than-expected
Retail companies posted EBITDA growth of 34 per cent in the quarter, higher than the revenue growth. A large part of these savings is driven by savings in operational expenses and some benefit from better product mix. All companies have taken steps to rationalise employee costs, ad spend and other administrative costs. Some help from softer rentals was also felt in the quarter, but Q4 and FY10 will see the full impact of the lower rentals, believe experts

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