Retail sector A Perfect Play On Consumption Story In India

If there is any single industry that can gain the most from the growing Indian economy, it is the retail industry in India. The Indian economy being the fastest growing economy in the world has attracted a lot of attention of the global investors. Indeed, a host of global retailers are vying for a larger pie of Indian retail industry that promises to grow by close to 20 per cent CAGR in the next three to five years. India’s retail sector is projected to grow to $ 1.3 trillion by 2020 from the $672 billion in 2017.

There is no doubt that the India’s retail sector is growing at an unprecedented speed owing to the trend of rapid urbanization and digitisation, improving disposable incomes and lifestyle changes of the middle class. The consumption growth story is intact and it is one of the most credible growth stories in India. The rising consumption story in India has managed to make the Indian retail industry the fastest growing retail market in the world.



The retail industry has a come a long way in the past couple of decades. The shift from the traditional shops to large multiformat stores in malls offering global experience and the emergence of e-commerce is shaping the fortunes of the retail industry in India. The advent of e-commerce and the mall culture in India has pushed the overall consumption higher to unprecedented levels.

The Indian retail industry has been traditionally unorganised. With the GST now a reality, the organised retail sector is gaining traction and is on a faster growth trajectory. Organised retail is growing at a rapid pace of about 20-25 per cent annually. By 2020, the organised retail penetration is expected to be over 10 per cent of the total Indian retail market. Currently, the organised retail market is just 7 per cent of the total market.

In bigger cities (top 7 cities), it is estimated that the organised retail market will increase to 19 per cent by 2020. What is also defining the retail industry in India is the high demand for a superior customer experience and penetration of big brands into smaller towns and cities.

One of the major reasons for the thriving retail sector in India has also been the policy boost provided by the government. The liberalisation in the FDI policy for the retail sector by the Centre has put the Indian retail sector on the global map. The policies have been able to attract a large number of global retailers to Indian markets, thereby fueling the growth of the organised retail sector further. Investors are well aware of the benefits of government’s decision to allow 51 per cent FDI in multi-brand retail and 100 per cent FDI in single-brand retail.

When the industry is on a growth trajectory, it is but natural that the retail companies are reflecting growth and enthusing investors. Here is a peek into the performance of the retail stocks.

Q3FY19 : Retail Companies Retail sector witnessed a positive quarter buoyed by the steady demand. The average sales growth of the sector for the quarter ended December 2018 came in at 23.7 per cent YoY. The profits for the sector also rose 37 per cent, although the PAT margins saw a contraction of 30 bps. The highest sales growth in this sector was recorded by V2 Retail at 58 per cent, followed by Future Lifestyle Fashions Ltd, which registered a sales growth of 35 per cent. In contrast, Future Enterprises Ltd reported tepid sales numbers, clocking a growth of 1.97 per cent. Shopper’s Stop stood out in terms of profitability, with growth of 171 per cent and Future Enterprises registered a de-growth of 98 per cent in net profits. From the table (peer comparison), Shoppers Stop appears to be attractive in terms of P/E, P/B, growth numbers and return ratios as compared to its peers. Trent and Avenue Supermarts' valuations look stretched, despite their attractive longer term prospects.



Conclusion 
While opportunities exist in the fastest growing sector in India, the sector is also faced with its unique challenges. Any investor willing to take exposure in the retail stocks will have to pay attention not only to the expensive valuations that most retail stocks trade at, but he will also have to factor in the increasing competitive landscape in the sector. Not every retail player is able to taste success in the retail industry in India. The diverse policies of various states as also the local influences act as hindrance for growth and expansion. The high cost of real estate is onefactor that makes it difficult for retailers to expand profitably. The deep discounting adopted by e-tailers is a growing concern as it is impacting the margins for the existing players. Another challenge that the industry is faced with is the lack of availability of skilled manpower in the rural markets. Notwithstanding these challenges, the sector is ripe for investment and the opportunities are huge. The rural market is expected to be the growth engine going forward for the industry. Urbanisation and digitisation is here to stay and this ongoing trend is only gaining momentum, which augurs well for the retail sector. Aggressive marketing spend by retailers and the opening of new stores will ensure that the volumes will improve for the retailers. It will be interesting to see how many players manage to encash the growth opportunity profitably. Growth investors, while building a diversified portfolio, cannot ignore the prospects of the retail industry. An allocation of close to 10 per cent to quality retail stocks can be a good idea.