Retail Sector : A step in the right direction…: ICICI Securities

A step in the right direction…
On Friday, the Cabinet once again approved the Department of Industrial
Policy & Promotion’s (DIPP) proposal to permit foreign direct investment
(FDI) in multi-brand retail. After a  long phase of policy paralysis, the
government has announced some big ticket reforms over Thursday and
Friday, last week. Pertaining to the Indian retail sector, the Union Cabinet
has decided to allow up to 51% FDI in multi-brand retail (subject to some
conditions). The government has made this a state subject and each state
has the right to disallow FDI in their  state.  So  far,  nine  states  and  two
Union Territories have given their written consent for allowing FDI in
multi-brand retail in their states. In our opinion, allowing State
Governments to reject FDI in their states has reduced the opportunity size
for the foreign investors. However,  partly opening up the multi-brand
retail segment to FDI will be a sentiment booster for the listed retail, real
estate and consumer companies while the actual benefits may fructify in
the long term.

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Lower opportunity size than before…
Though the approval to allow FDI in multi-brand retail (with the final say in
the hands of state governments) will be positive for foreign players, it will
still limit the pie as some states may disallow foreign players to enter their
states.
…but consumers, farmers and manufacturers to benefit
With the opening up of the multi-brand segment to FDI we expect
consumers to benefit as increased competition will mean better quality
goods at attractive prices for consumers. Also, farmers and
manufacturers will benefit from the 30% domestic sourcing clause as they
will have a fixed buyer for their produce/goods.
Debt laden/cash strapped companies to also gain
We expect the listed retail, real estate and consumer companies to get a
sentimental booster in the short-term while financial benefits will follow in
the long run. Domestic retailers who are laden with debt burden/tight on
cash will get their much needed capital to boost growth. Also, retail real
estate developers and consumer companies will benefit from growing
modern retail. CESC is also likely to benefit through divestment of stake.
Well begun is half done…but a lot more clarity is awaited!
The clearance of DIPP’s proposal  is surely a  welcome move. However,
one  will be able  to assess the financial benefits of the  same only in the
long run. The official notification, which will detail the guidelines, will be
the next thing to watch out for. Also, one needs to wait and watch how
domestic retailers will be able to structure their companies to comply with
the state requirements (could be done through floating special purpose
vehicles). We also need to await the foreign retailer’s take on the recent
approval considering that the opportunity has also relatively reduced (as
the FDI approval will not be pan-India). Hence, all in all while the first step
taken is headed in the right direction, a lot more clarity is awaited.

http://content.icicidirect.com/mailimages/ICICIdirect_FDIRetail_%20SectorUpdate_September2012.pdf