Edelweiss: Retail - The commotion gets louder

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The Finance Ministry has approved the draft Cabinet note on Foreign Direct Investment (FDI) in retail which significantly seeks a 51% FDI permit in multi-brand retail, according to media reports. This echoes a proposal by a committee of secretaries (CoS) in July this year which also sought higher permissible limit cap in single brand retail. We believe the discussion has now gained traction and a final Cabinet note in this regard is likely next week. The move will benefit Pantaloon Retail (PRIL) and Trent as these companies currently have or are in the final stages of tie-ups with global retailers eagerly waiting to enter India. Shoppers Stop too welcomes FDI although it is currently not looking for a partner.

Finance Ministry nod to 51% FDI in multi-brand retail

The Finance Ministry has approved a draft Cabinet note on FDI in retail that significantly seeks a 51% permit in multi-brand retail. The move echoes a proposal by a committee of secretaries in July this year which also recommended hiking the permissible limit cap in single brand retail. We consider that this will be a positive for the Indian retail sector (Pantaloon Retail, Shoppers Stop, Trent, Titan, etc.) as it would stimulate investment, especially in logistics and cold chain development besides reducing the overhang of debt. Senior BJP leader Mr. Yashwant Sinha has clearly stated his party’s opposition to the move. However, this bill may not be required to be passed by the Parliament. FDI which dipped 25% to USD19.42bn in 2010-11 from USD25.83bn in the previous fiscal provides a strong case for the government to hasten the decision.

Govt accords priority to back-end infrastructure, small industries

However, the CoS had also proposed few riders:

·         Minimum FDI at USD100mn, half of which must be invested in the back-end infrastructure like cold storages, soil testing labs and seed farming.

·         The government intends to allow these chains to operate in large cities only i.e., in cities with a population of more than 1mn.

·         Fresh agricutural produce may be unbranded as the government holds the first right to procurement agri products

·         30% of the manufacturing goods procurement must be from small industries.

Outlook: Positive

India’s total retail sector is estimated at USD590bn with the unorganised sector accounting for USD496bn. Concerns that it would impact neighbourhood kirana stores had perennially delayed this crucial reform. However, we believe that the discussion has now gained traction and a final Cabinet note in this regard is likely next week. Top plays on retail in FDI are Pantaloon and Trent. Future Group CEO Mr. Kishore Biyani, post this announcement, has stated that the Future Group may look at strategic partners. Shoppers Stop is not looking for a partner hence this will not benefit it directly. We have ‘BUY’ recommendation on Shoppers Stop and ‘HOLD’ on Pantaloon.