>INDIA RETAIL: A step back for government; a set‐back for sector!!

Government has suspended 51% FDI in Multi‐Brand Retail till a consensus is

reached amongst all stakeholders (Political parties, State governments etc).

Proposal has faced widespread political (government allies, opposition parties) as

well as trader’s opposition ever since it was announced in a cabinet meeting. We

don’t expect government to explicitly rollback the proposal given that it will

reinforce the perception of “policy paralysis” and will be seen as giving in to political

pressure. However, given the perceived political cost attached to the proposal and

impending state government elections, primarily UP (most populous state which

accounts for ~15% of Loksabha members) we believe it will be a while before

government ventures to bring this reform back as it lacks the requisite numbers as

its key allies (DMK, TMC) are opposed to the Retail FDI reforms. While there exists a

remote possibility of some give and take/ appeasement of allies, watering down of

proposal (26% instead of 51%, starting with top 10 metros instead of 1mn plus

towns etc) we believe evolving a consensus amongst all stakeholders is a

cumbersome process and will take its own time and will be a drag on the sector.

Going by the fate of several other policy proposals, we will be positively surprised if

the proposal goes through during the term of this government.

■ A step back for the government; a set‐back for the sector: After much flip-flop

and endless debate (DIPP had floated discussion paper in July’10), Government

had cleared the politically sensitive reform, only to suspend it now till wider

consensus is reached amongst stakeholders. Proposal had faced widespread

opposition from political parties (opposition as well as government allies),

trader’s lobbies and had stalled the working of Indian Parliament for 10 days

since the proposal was announced. The announcement had created positive

sentiments around the sector with the assumption of inflow of capital and

foreign expertise post the clearance of FDI. We don’t expect the government to

revive this legislation anytime soon given the lack of numbers and impending

state government elections in next 12 months. We expect the proposal to

remain in cold storage and meet the same fate which several other government

proposals have met (Urea policy, GST, DTC, Land Acquisition etc). We will be

positively surprised if it goes through during the tenure of current government.

■ Media speculation on Future Cap stake sell: As per media report (Economic

times dated 7th Dec’11), Pantaloon is about to announce the Future Capital

stake sell to Deccan Chronicle for ~Rs6-7bn. We spoke to management and it

has denied this transaction. Media report also mentions “Industrial Investment

Trust (IITL) has purchased Pantaloon's 26% stake in its insurance joint venture

Future Generali Life for Rs 250‐300 crore”. If both these deals indeed fructify, PF

will be able to raise ~10bn and mitigate the strain on debt and cash flow. Core

retail debt stands at ~Rs45bn. We estimate an interest cost saving of ~Rs500mn

for FY12e, potentially resulting in ~30% upgrade to our FY12e EPS (Rs8.5)

■ Maintain ACCUMULATE on PF: While the FDI proposal is now being put in

abeyance, we anyways didn’t expect it to immediately solve the current

challenges of high leverage, high inventory and lack of FCF generation for PF.

While fundamental concerns of slowing same store growth and high leverage

putting pressure on cash flows remain, we believe current price discount the

same. Any stake sell announcement on non-retail subs will be key trigger.

To read the full report: INDIA RETAIL

RISH TRADER