Fitch: Retail sector outlook now stable

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(The following statement was released by the ratings agency)

Fitch Ratings has today said, in a just published Special Report, that the agency expects greater stability in the ratings of Indian retailers in 2010, given improving economic and consumer sentiment, a scale-back in expansion, and improving margins.

Fitch expects comparable store sales growth to be better than in 2009, and the recovery which started in H209 to continue.

Sales across all formats have started to improve. "Value retailers" have led the recovery trend, followed by department stores. Fitch notes that the recovery appears sharper for department stores, although this is partly due to the fact that department stores faced a sharper decline during the downturn. Fitch expects that both "value" and "lifestyle" retailers will continue to report better performance in 2010.

However in 2009, substantial liquidity pressures did affect Indian retailers, especially those retailers which had over-leveraged and expanded beyond their capacity.

With volumes under pressure, this had a disproportionate impact on their financials and liquidity as a result of lower sales from new stores, and inventory build-up.

Fitch notes that segments such as durables/electronics and home merchandise remained subdued, although these segments started to recover from Q3 FY10.

Most retailers have used the downturn to undertake costs containment, as well as to improve supply chain efficiencies, which will aid margins in 2010. Cost structures should also benefit from lower lease rentals.

Fitch expects retailers to be cautious and more selective with regards to future expansion plans, and expects the pace of new store openings to be slower compared to during earlier expansion phases.

Liquidity has improved for many Indian retailers from one year ago. Internal sources of liquidity have strengthened as retailers Fitch rates have reduced working capital and capex. Operating cash flows should further strengthen due to better inventory management and from an ongoing focus on cost reduction.

Most retailers have been financing their expansion through a combination of proceeds from equity issuance and debt. With the general improvement in capital market sentiment and investor appetite for the retail sector, Fitch expects retailers to once again tap the equity market in 2010.

However, the agency expects the credit profiles of major retailers to remain stable during 2010, even without the equity raising.

The full report, "Indian Retail Outlook 2010: Back to Stable", is available on the Fitch Ratings website 'www.fitchratings.com'.