Retail players welcome new FDI move

On Thursday, Nov 24, 2011, the govt. increased the limit of Foreign Direct Investment (FDI) in the retail sector. The govt. has allowed 51% FDI in multi-brand retail and increased the limit in single-brand retail from 51% to 100%. The decision has lead to the retail stocks witnessing a strong upmove on the bourses. Among the retail stocks, Pantaloons is up 17%, Shoppers Stop is up 6.29% and Vishal Retail up 20%. This time, the govt. took some positive steps in terms of getting newer and better reforms. We feel this is a strong move from the govt. that will help the retail sector to become mature and better organised.

Due to poor storage facilities, wastage and an inadequate supply of stocks, there is a huge price gap between the farmers’ revenue and what consumers pay for the final product. The move will reduce the supply gap and build strong logistics, which could help product prices come down. This, in turn, could help control inflation to some extent.

On the other side, the local kirana stores would face some serious competition now. They will need to modernise themselves and provide the same satisfaction to customers (including price discounts and product availability) that multi-brand retail stores provide. The intermediaries would also be affected, as the large chains will now directly take up goods and raw materials from farmers or suppliers.

The maximised single-brand retail limit has raised further questions about joint ventures and franchises. Will the retailers continue with their partnerships going ahead, or take full fledged operations at their risk. Examples of such stores are Nike and Levis.

Also, cash strapped companies may now find investors who can help the inflow of funds. The biggest failure of the Indian retail sector was that of Subhiksha, which resulted from liquidity crisis and poor inventory management. Companies in the sector are also facing issues like rising debts and slowing of sales. Earlier, Vishal Retail was also cash strapped. With this move, the Indian retailers will have enough liquidity, better technology and proper management, which will help them to grow.

The Congress government has made this move even though it was faced by strong opposition from the BJP and other parties. We feel  that this news was much awaited, and will definitely help the sector and the economy to grow going forward. A good amount of FDI is expected to flow into the country, but we feel that this may happen only in the direction of the larger cities, where the demand for consumption is high. It will take at least 2-3 years for this move to be properly implemented. However from a stock-specific perspective, investors should now take a wait-and-watch approach and see how the companies plan and implement this opportunity before they buy the stocks.