Retail stocks have always reacted to policy changes on foreign direct investment in the sector.
The possible beneficiaries are the likes of Shoppers Stop (HyperCITY), Trent (Star Bazaar), Pantaloon Retail India (Big Bazaar), and Reliance Industries (Reliance Fresh), which have far-flung retail footprints.
Up to 51 per cent investment by a foreign player in multi-product retail (super markets) is now allowed. But whether this move will prop up the sector’s prospects materially in the near term is open to doubt.
But the new rules require that at least half the investment coming from the foreign entity should go towards building back-end infrastructure and supply chains in the first three years. If foreign investors do come forth to do this, it will benefit domestic retailers, who lack incentive to invest heavily in setting up an exclusive supply chain. Addressing the supply chain and cost issues could help these retailers expand their footprint and margins (currently around 3-5 per cent at the net level).
Players have heavily moderated expansion, in the light of slowing consumption and lack of funds. Only the latter problem can be addressed through foreign investment. Pantaloon Retail especially has been driven to sell off stake in key clothing format Pantaloon, among a host of other moves, under a heavy debt burden. Other retailers to scale back include Shoppers Stop. Expansion would be crucial for retailers to achieve scale, which trims costs. This is the premise on which big retail operates globally.
Obstacles, however, lie in the provisions in permitting foreign investment. There are geographic restrictions in the form of having to obtain permission from each state to set up shop, and in the population of the city or town. This puts a damper on the effectiveness of economies of scale. It also brings up the question of whether existing retail store chains can invite foreign capital as the chains’ geographic footprint would violate the provisions.
Decisions on fuel to aid upstream PSUs
The Government’s decisions on fuel pricing and supply are likely to boost the net profit of upstream public sector companies ONGC, OIL and GAIL. Indian credit rating and research agency Crisil has estimated that oil marketing company under-recoveries will be reduced by Rs 20,000-25,000 crore to end the year at an all-time high of Rs 1.6-1.7 lakh crore.
The reduced under-recoveries are expected to reduce the upstream PSUs contribution under the subsidy-sharing mechanism as well. Assuming that their share remains at 40 per cent of total under-recoveries, the revenues of these PSUs will rise by Rs 8,000-10,000 crore. At the current tax rate of 33 per cent, their net profits will rise by Rs 5,500-7,000 crore, Crisil estimates.
But for the OMCs, the impact of the price hike will be marginal, only to the extent of some improvement in liquidity position given the 12-15 per cent reduction in under-recoveries.
Of the Rs 5 per litre hike in diesel prices, Rs 1.5 per litre is on account of the hike in excise duty, while only Rs 3.5 per litre will go toward reducing OMC under-recoveries. In the case of LPG, the Government has directed that only six LPG cylinders will be provided per connection every year. This implies that only three subsidised cylinders will be available per connection for the remainder of 2012-13. Given that an average eight cylinders were consumed per connection in 2011-12 and the average under-recovery was Rs 350 per cylinder, this will reduce the OMC losses on subsidised LPG by around Rs 5,000 crore.
The Government has also slashed excise duty on petrol by Rs 5.3 per litre, though the retail selling prices will be maintained at current levels. This is intended to eliminate the OMC losses on the fuel at current international prices.