Edelweiss Flash: Retail - Multi brand retail- dream come true

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The Union Cabinet has green lighted foreign partners holding up to 51% in multi-brand retail and 100% in single-brand retail (from current 51%). We perceive this move, if well executed, to benefit retail companies, consumer companies and consumers. This is expected to stimulate investment, especially in logistics and cold chain, thereby reducing wastage and food prices. The move will benefit Pantaloon Retail (PRIL) the most as it will help trim debt and enable it to continue expansion and also Trent as these companies currently have or are in final stages of tie ups with global retailers who are eagerly waiting to enter India. As per our discussion with PRIL and Shoppers Stop, the bill is not required to be passed by the Parliament. We expect share of modern retail in India for consumer companies to jump from current ~8% to 20% plus by 2020.

Saviour for stressed companies, Fight food inflation

We perceive this as a huge positive for the Indian retail sector as it will stimulate investments, especially in logistics and cold chain development (help food companies and reduce food inflation), besides reducing the overhang of debt. Although Shoppers Stop is currently not looking to enter into a tie up, it is worthwhile to note that in China, even after years of FDI many local players are doing well and are amongst the top 10 retail chains. Inadequate storage facilities lead to significant wastages (wastage is ~35% for tomatoes, ~30% for mangoes and ~25% for potatoes).

Positive for Consumer companies

We believe discretionary consumer goods will benefit as it will help increase consumption and prop volume growth by ~2%. Modern retail accounts for 20-30% share in top cities for consumer companies. Key beneficiaries will be HUL (has higher market share in modern retail) and food companies like Nestle, GSK, Marico.

Riders likely; focus to be on back-end infrastructure

We expect the bill to come with a few riders. Most likely would be: (1) applicable in cities with a population of more than 1mn (likely 36+ cities) (2) minimum FDI of USD100mn, half of which must be invested in back-end infrastructure; (3) 30% of manufacturing goods’ procurement must be from small industries; and (4) fresh agricultural produce may be unbranded as the government holds the first right to procure agri products. Likely approval from state government might be required.

Outlook: Upbeat

The decision to open the retail sector’s doors has come at the right time when global players, facing headwinds in their home countries, are scouting for new markets and domestic players, on the other hand, are strangulated by piling debt. Top plays on retail in FDI are Pantaloon and Trent. We also expect Walmart to be a key beneficiary due to its tie up with Bharti group and expect IKEA to enter India. Other potential beneficiaries could be Spencers, Lifestyle, Birla Retail, Reliance Retail, Globus etc.