GST will boost the growth of brick and mortar retailers!

As per CRISIL revenue growth of the organized B&M retail sector is expected to improve to 14-16% annually in the next two fiscals compared with 13% compounded annual growth rate seen between fiscals 2015 and 2017.
GST will boost the growth of brick and mortar retailers!

 

Operating margins of organized brick & mortar(B&M) retailers are expected to improve by 100 basis points (bps) from about 6% over next two fiscals riding on three tailwinds: online retailers going slow on discounts to reduce cash burn, benefits from the implementation of Goods & Service Tax (GST), and increasing store productivity.

Speaking on upcoming GST, Sanjay Vakharia, COO of Spykar Lifestyle, said, “The industry is expecting the slab to be 5% since clothing and textiles form a part of the essentials for every human ,if it is put under any other slab then the apparel will need to become more expensive ,currently the taxes levied adds up to around 7-8% in totality. The definition is ambiguous since every garment carries a label and hence it's branded. so there is no way to differentiate between a branded and an unbranded product if they both carry a label. The introduction of GST will surely help in doing business seamlessly through the country. the ease of doing business will surely grow the business at all levels. It's not just the cost of domestic brands which will increase as if it impacts, it will impact all.”Besides online, Spykar retails from over 200 standalone stores and over 1200 retailers across 330 cities of India.

Further, pace of store expansion is also expected to increase over the medium term to cater to the increasing demand. Despite this, CRISIL expects the credit profiles of its rated B&M retailers to remain steady, driven by better operating matrics and adequate debt metrics.

CRISIL has outstanding ratings on 86 B&M retailers including 27 large( more than Rs. 500 revenue), 22 mid-sized( Rs.100 crore to Rs. 500 crore revenue) and 37 small ones.

India’s top three retailers lost more than Rs. 30 crore per day-or Rs. 11,000 crore in fiscal 2016 because of large –scale discounts and aggressive marketing. Besides, the Department of Industrial Policy & Promotion( DIPP) regulation in March 2016, which restricts discounting and vendor concentration, has been favorable for B&M retailers. Consequently, online retailers have been gradually focusing on lowering share of discounts as well as losses, which has led to moderation in their growth.

Also, under GST, B&M retailers will be able to set off service tax on rent against taxes on goods. Rent is one of their largest cost components, ranging between 5-6% of sales. The B&M retail sector will also benefit from rationalization of logistics costs because of flexibility in procurement and seamless movement of goods facilitated by implementation of GST.

Revenue growth of the organized B&M retail sector is expected to improve to 14-16% annually in the next two fiscals compared with 13% compounded annual growth rate seen between fiscals 2015 and 2017. Also, over the last two fiscals, annual sales per square feet has increased from Rs. 12,000 to Rs, 13,800 for a sample of 10 large B&M retailers. CRISIL believes that continuation of this trend would result in better store productivity and improved operating leverage.

Anuj Sethi, Senior Director, CRISIL Ratings said,” We see the profitability of B&M retailers improving as competitive intensity( from online rivals) moderates and service tax on rent gets set off in the GST regime. And as growth rises, so will revenue per square feet, which, in turn, will improve their fixed-cost absorption ability. This will provide at least 100 bps positive delta to operating margins for B&M retailers.”

As growth and profitability look up, CRISIL expects capital expenditure( capex) of B&M retailers would increase by 15-20% over next two fiscals compared to capex incurred in past two fiscals. Despite increase in capex, which will be part debt funded, improving operating metrics and better cash generation will continue to support the credit profiles of retailers.

 

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