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The Textile Magazine
DECEMBER 2011
Only modest FDI inflows: CRISIL
According to CRISIL, the food
and grocery (F&G) vertical would
attract a larger share of the likely
FDI inflows. The clause specifying
50 per cent investment in back-end
infrastructure especially aligns with
the commercial requirement in the
F&G segment. F&G accounts for
two-thirds of Indian retail sales, but
currently has organized retail sales
of only around two per cent, the
lowest among retail verticals.
“To improve profitability in the
F&G segment, retailers need to
control their supply chain costs and
build scale,” said Mr. Ajay D’Souza,
Head - CRISIL Research. “Every
percentage point reduction in sup-
ply chain cost and resultant gain in
EBITDA margin can improve equi-
ty IRR of an F&G store by 250-300
basis points. Foreign retailers, with
their access to capital and technol-
ogy, are well placed to leverage this
opportunity.”
Considering the likely supply of
quality retail space and current or-
ganised retail penetration (ORP) in
large cities, CRISIL believes that
ORP will still remain moderate,
reaching about 11 per cent by 2015-
16 from 6.5 per cent currently. The
lead time to identify
appropriate store loca-
tions and address is-
sues in rolling outback-
end infrastructure will
also limit the pace of
growth in ORP.
The recent Cabinet
decision allowing 51
per cent FDI in multi-
brand retail and 100
per cent FDI in single-
brand retail is likely
to catalyze joint ven-
tures between Indian and foreign
organized retailers. Depending on
whether they buy into existing retail
chains or set up new JVs, the share
of foreign retailers in multi-brand
organized retail will remain moder-
ate and is expected to vary between
10 and 20 per cent by 2015-16.
Comparatively, in China, where
organized retail accounts for 20-25
per cent of total retail sales, foreign
retailers have a market share of 25-
30 per cent in organized retail, built
over the past 15 years since FDI in
retail was opened up.
The FDI proposal offers good
prospects for large established Indi-
an retailers. FDI would enable these
players attract capital for driving
their expansion plans and, in addi-
tion, benefit from scale, cost effi-
ciencies and technology brought in
by foreign retailers.
“The aggressive growth plans of
leading Indian retailers, which were
under pressure due to increasing debt
stock and moderation in customer
footfalls in the current year, will get
a strong boost from the availability
of capital. However, for smaller and
regional retailers, scale of operations
and control over costs will determine
their ability to weather pressures of
aggressive expansions by large re-
tailers”, said Mr. Anuj Sethi, Head,
CRISIL Ratings.
w
Foreign direct investment (FDI) in multi-
brand retail will stimulate investment in In-
dian retail. CRISIL estimates FDI inflows of
$2.5-3 billion over the next five years, mod-
est in the context of overall FDI inflows of
$160 billion in India over the past five years.
Mr. Ajay D’Souza,
Head - CRISIL Research
FDI
in
Retail