The Cabinet on Wednesday allowed 100 percent foreign direct investment (FDI) under the automatic route for single-brand retail. To discuss in detail what would be the positive impact of the above development on ground for the retail companies CNBC-TV18 spoke to Rakesh Biyani, Joint MD, Future Retail, J Suresh, MD and CEO, Arvind Lifestyle Brands and to know the impact on their growth and stock prices, they spoke to Abneesh Roy, Senior VP, Edelweiss Securities.
The Cabinet on Wednesday allowed 100 percent foreign direct investment (FDI) under the automatic route for single-brand retail.
To discuss in detail what would be the positive impact of the above development on ground for the retail companies CNBC-TV18 spoke to Rakesh Biyani, Joint MD, Future Retail, J Suresh, MD and CEO, Arvind Lifestyle Brands and to know the impact on their growth and stock prices, they spoke to Abneesh Roy, Senior VP, Edelweiss Securities.
Biyani said although all policies in India so far haven't attracted enough FDI, the above move could make it easier for companies to do business.
Echoing Biyani's thoughts, Suresh said FDI relaxation besides increasing ease of doing business will also make help Make in India initiative.
The government has decided to allow single brand retail trading entity to set off its incremental sourcing of goods from India for global operations during initial 5 years, beginning April 1 of the year of the opening of first store against the mandatory sourcing requirement of 30 percent of purchases from India.
The relaxation in the 30 percent sourcing norm is a more significant move which will further help many companies to do business in India in the single-brand route, said Biyani, adding that it is a reasonable concession.
According to Biyani, without manufacturing in a country like India, it is not going to be possible to build a scalable business model. Companies like Ikea, H&M which are 100% FDI would definitely benefit from easier sourcing norms.
Biyani said, the entire policy mechanism with regards to retail needs to be simplified further, so that India, which is emerging as one of the largest consumption markets gets the right sort of investments and also so that retail can deliver to its full potential.
However, several retail categories in India still do not get an opportunity to grow their businesses, and a look at that could have helped, said Biyani, adding that he is hopeful of the government coming out with a simpler policy that will make India an attractive FDI destination.
Suresh also said complexities in the retail business have to be eased.
Agreeing with Suresh, Roy said other complexities in retail business has to be eased. However, he is very upbeat on the growth of retail companies going forward and expect them to report double-digit same store sales.
Several retail companies will deliver strong EBITDA and net profit growth, said Roy.
The online retail has also seen next phase of evolution with them setting up physical stores, like Myntra set up LensKart, Amazon acquiring physical retail stake etc., said Roy.
Below is the verbatim transcript of the interview.
Latha: What is the material difference of this announcement?
Biyani: I think approval route and automatic route, since the approval process now does not require – will reduce the timeline to start business by at least four to six months. So that is one. However, I think the bigger underlying change that has been announced yesterday which is under this route where the 30 percent sourcing norm, there is a significant relaxation for a period of five years where instead of really sourcing for India to sell within India, incremental sourcing done for overseas would be considered towards that obligation. I think that sort of makes it easier for many companies to do business in India on a single brand route.
If you really look at the overall retail policy, and we have been sort of taking about it for several years, significant amount of policy announcements have happened in the previous government and this government, unfortunately none of them have really attracted any amount of significant FDI in India. I think that is more to do with the complexity that exists in the entire policy thought process. Brand wise policies, category wise policies, and now different ways of calculating the sourcing norms, I think it is just too complex for a simple trading business called retail.
There was an opportunity and that opportunity has to be taken up to how do we simplify this entire policy mechanism so that India which is emerging to be one of the largest consumption markets, truly gets the right set of investment so that the retail can deliver to its potential over the next decade or so.
Sonia: What is your view on how the relaxation of the 30 percent sourcing norms could impact, not just the industry, you spoke about that, but also a company like yours?
Biyani: For us it does not make an impact because whatever business that we try and do even on a joint venture basis, we typically would look at manufacturing in India. What I believe is a fact that without really doing manufacturing in a country like India, it is not going to be possible to really build a scalable business model. So, while I think some companies which are very large in size, they need a lot more time before they can factor in a new way of doing supply chain management. They can really factor that only if they are able to build the scale in India and for them I think it is a good start.
So I would say companies like Ikea, or companies like H&M, which are both 100 percent FDI investments, and both are large investments, they would definitely benefit from this. Ikea more because it has to really setup a large scale furniture manufacturing facility, etc. and quite a lot of that does not exist to a very large extent in India. So while they will continue to source the linens, etc. from India which is very good out of India, they get extra time to do the domestic sourcing.
So I just hope the fact that -- ultimately our objective should be to encourage manufacturing within the country and maybe at the end of five years that would happen and that would really bring in the real benefits of FDI to the market. So, it is a good way to startup, I think it is a reasonable concession, but I think the larger opportunity was to sort of really look at, if you really look at, almost all the policies about what foreign companies can do or cannot do but there was an opportunity to sort of address the capital needs of the domestic companies specifically in the so called multi-brand space.
Truly speaking, this brand definition has no meaning. Frankly, it is about really serving the customers’ needs and you will have multi-categories. It is not going to be possible for everybody to produce everything in a single brand. Several categories which have been consumed in India are not getting the right kind of opportunities to sort of grow their business and that simplicity could have had helped. I am just still hopeful that over a period of time government will have the wherewithal and have the learnings around what has happened in the last few years and come up with a more simpler policy which would actually make India a truly attractive FDI destination.
Latha: Both these rules, the single brand retail entry through the automatic route for 100 percent FDI as well as the dilution or easing of the sourcing norm, how will it impact textiles?
Suresh: I echo what Rakesh Biyani was mentioning. I think what it does is just eases ease of doing business and also in terms of sourcing norms I think it will encourage Make In India for some of the global people. So as a fashion retail, I am not expecting a huge amount of inflow of foreign exchange because of this change mainly because even otherwise the approval route was available and it is a question of three to four months delay, you can always open a retail store. So I don’t see a big impact in terms of the foreign exchange investment. I think it is more complexity in terms of retail policy which has to be untangled if really the country has to attract international investment into retail.
Sonia: You heard both the gentlemen from the corporate side, what is your own view on how the stocks would move because the sector as a whole is now trading at about 20 times FY20 EV/EBITDA. How is that placed and what are your top picks here?
Roy: We are quite positive on the entire space. We have seen sentiments improve. India has been rated as the best retail destination by independent study. We have seen in the past few quarters’ significant recovery in the same store growth across most formats. If you see QSR, jewellery, fashion, and even food and grocery, even this quarter we expect most of the companies to clock strong growth and it is an improvement versus earlier. So most companies should see close to a double digit same store growth.
In terms of online also, because the government regulations and funding drying up, we have seen discounting come off and physical retailers have also adapted to the situation. Future Group is rolling out Retail 3.0, similarly D-Mart is doing D-Mart Ready, Shoppers Stop has tied up with Amazon. So in terms of online also, clearly we are seeing the next phase of evolution and discounting coming down. We have seen online players setup physical stores, we have seen Myntra setup, Lenskart. Similarly Amazon has acquired globally and within India physical retailers some stake and Alibaba in China also.
Anuj: The issue here is that some of these stocks have – Future Retail for example, from Rs 200 to Rs 600, V-Mart, D-Mart, all these stocks have rallied a lot. So, the point here is how much of this is already in the price or are we looking at a consistent 30-40 percent kind of CAGR over the next 10-12 years, is that that the market is pricing right now?
Roy: The entire market, India and global market, are at a multiyear high and retail companies have seen huge course correction, debt reduction, sale of non-core assets. So, yes, retail stocks have done well. In terms of the profit growth, clearly it will be a very strong growth in the coming years. For most companies, we expect EBITDA growth of strong double digits across the board and also debt levels have come down. So clearly earnings growth is something which will propel the next cycle.
Rerating may not happen, but clearly if you see, Indian market is the highest growth market currently and we are seeing sentiment improvements. So our top picks currently are Trent, Titan, Future Retail, and Shoppers Stop. We are also positive on rest of the names – in some stocks, valuation comfort is not there, for example, Avenue Supermart (D-Mart), great story, but valuation comfort may not be there in some cases. However, frankly speaking, we do expect significant upside in the next one year for most of these stocks.
Latha: What is your sense, how have footfalls been and is the story as cheerful as Abneesh Roy is saying that there is a sizeable improvement in demand in your stalls?
Biyani: I think Abneesh has been tracking the sector and he is sort of summarised is quite well. The markets have been buoyant, and I think the big difference is the fact that organised retail is not a very old business in India. The companies have matured, the teams have matured, the execution standards that we are able to achieve are significantly higher. I think also when you really look at -- now GST has for the first time enabled the real supply chain act that an organised retail must bring in where we can bring in the scales to the benefit of the consumer. We can actually sort of promise on to the delivery without worrying about where will we get it from because in the past taxation was a huge hindrance to create efficient supply chain.
I think the real enablers to sort of take the benefit of an organised retail chain or organised distribution, has really started with the implementation of GST. GST is just about settling in and I think almost not only us but I know for a fact that several of our partners who sort of help us supply goods, etc. are already looking at and are in discussion with us in terms of how do we sort of improve the entire experience of the consumer at an organised retail store. I also strongly believe the fact that when we are going to be able to implement that, we would actually see a significant amount of savings for the customers coming in our stores and the entire experience would go up. I think that is what the real enabler of an organised retail is and that has got to happen in the next couple of years.
So while we are a decade old business, but the real work has started today and I think the good times are still to come. The demand will be stronger, and we will ensure the fact that we bring in prices and products which convinces customers to come and shop with us.
Latha: 20 percent CAGR, not an overestimation?Biyani: Not an overestimation, definitely.