Retailers, such as Pantaloon, Shoppers Stop, Trent and Next Retail, are likely to benefit from buoyant sales, improved working capital management and stable margins, Fitch Ratings stated. The total debt for the companies is expected to increase mainly to fund growing capital expenditure as they look at increasing market share and retail footprint, Fitch study showed.
However, debt levels are likely to be supported by higher operating profits and consequently leverage levels should remain stable and are likely to improve.
The report emphasises that the operating margins are likely to remain stable with potential small improvements. The margins will depend on each company’s choice of product category. This in addition to economies of scale, private label sales mix, and discounts from suppliers, will help strengthen margins.
With high space addition likely in 2011, the execution risk for larger retailers is likely to be lower as the pace of space expansion in relation to current scale reduces. However, smaller players and newer entrants are likely to be more aggressive, the report said.
A positive outlook would be likely in the case of strong sustainable positive and free cash flow. This is likely when inventory levels have been reduced significantly due to improvements in backend operations and logistics. These improvements can be incremental, and hence Fitch expects the outlook to change only in the longer term once such benefits accrue.
Retailers would be affected by a fall in same-store sales as well as margin contraction. The extent of the impact on individual companies will differ based on their capital structure, expansion plans and funding structure, said the report.