Wednesday, December 7, 2011

>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