Indian Government has approved FDI up to 51% in multi-brand retail (currently, foreign investors can hold upto 24%, but no FDI allowed), with the onus now falling on states to give the final authorization. Nine states and three union territories have shown interest for opening retail to FDI. Pantaloon Retail (PRIL) and Shoppers Stop (SSL) have more than 50% of their stores in these states. We consider PRIL and Trent as key beneficiaries. We expect SSL to scout for a partner for HyperCity. However, Mamata Banerjee (a key ally of Govt) had previously halted a similar attempt hence we need to watch out for her next move. Be sides, we would have to observe how easy it will be for retail companies to structure businesses in order to comply with state approvals. The Centre has also relaxed local sourcing norms in single brand retail. We expect the share of modern retail in India for consumer companies to jump from the current ~8% to 20% plus by 2020. Also, this is positive for discretionary consumer goods as it will help increase consumption and prop volume growth by ~2%.
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Centre approves 51% FDI, states to accord final sanction
Nine states and three union territories (Andhra Pradesh, Assam, Delhi, Haryana, Himachal Pradesh, Maharashtra, Rajasthan, Uttarakhand, Jammu & Kashmir, Manipur, Daman & Diu and Dadra & Nagar Haveli) have already shown support to FDI. PRIL and SSL have ~53% and ~62% stores respectively in these states, presenting them with a huge opportunity. To address the concerns of local kiranas, Govt will appoint a high-level group under the Minister of Consumer Affairs to examine issues concerning internal trade. The Government has made it mandatory that FDI in multi-brand be applicable in cities with a population of more than 1mn (could be relaxed in smaller cities in certain cases) and 50% of FDI investment must be invested in the back-end infrastructure.
Positive for consumer companies
We believe that discretionary consumer goods and larger organized consumer players too will benefit as it will help increase consumption and prop volume growth by ~2%. Modern retail already accounts for 20%‐30% share in top cities for consumer companies. Key beneficiaries will be HUL (with a higher market share in modern retail) and companies like Nestle, GSK, Marico, GCPL, Dabur, Emami, ITC, Colgate etc.
Outlook: Positive
Overall, we expect this to be a positive for the Indian retail sector as it will reduce its piling debt and stimulate investment (especially in logistics and cold chain). Biggest plays on this are PRIL and Trent. We also expect Walmart to be a key beneficiary due to its tie up with Bharti group. Other potential beneficiaries could be Spencers (part of CESC), Reliance Retail, Lifestyle, Birla Retail, Globus etc.
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