Monday, December 5, 2011

>Foreign Direct Investment in multi brand retail is finally here

As expected the approval comes with the following caveats. These were however well known before, so nothing very surprising in the fine print.
1. Companies will have to invest a minimum of $100mn or more
2. They can only open stores in cities with populations of 1mn or more.
3. At least 50% of the investment has to be in back end infrastructure – warehouses and cold chains
4. States will have the final say as stores have to comply with local legislation

We have highlighted before that this will be positive for the sector as a whole, where capital is severely constrained and companies have had to take on significant debt to put up front end stores as well as invest in back end infrastructure. With foreign participation now approved, this will allow them access to cheaper capital, which can significantly bring down the debt burden and help them improve profitability.

Operationally, investment in back end infrastructure will lead to efficiency improvements which will help these companies improve margins in the medium term.

Current penetration of organized retail is 6-7% of overall retail trade in India, which can increase significantly once capital is available at cheaper rates over the next few years. Indian retail companies have already been in talks with interested foreign retailers, so this final clearance gives them the chance to finalize their partnerships. We still think this will be 6-8 months away, but certainly a very strong medium term positive impact for retail companies.

To read the full report: FDI in Retail