India Brick Mortar Tender

Revenue growth of brick mortar BM retailers could increase 150-200 basis points bps in fiscal 2020 as e-retailers re-engineer business models to conform to the revised and more stringent regulations which would slow down their revenue growth. The Department of Industrial Policy Promotions recent clarification on foreign direct investment FDI policy by e-retailers restricts equity ownership in sellers caps the percentage procurement for sellers from e-marketplaces and puts curbs on exclusive partnership with brands or providing favorable services to a few vendors. Further the requirement of reporting compliance to the Reserve Bank of India on an annual basis would mean stringent implementation of these guidelines. Nearly 35-40 of e-retail industry sales amounting to Rs 35000-40000 crore could be impacted due to the tightened policy said Anuj Sethi Senior Director CRISIL Ratings. The impact on e-retailers would be largely in the electronics and apparel segments which account for a bulk of their revenues. CRISILs estimate suggests that if BM retailers lap up even a fourth of the impacted sales of e-retailers it would lead to topline gains of Rs 10000-12000 crore. That in turn would mean revenue growth would be 150-200 bps higher at 19 compared with CRISILs earlier expectation of 17 for fiscal 2020. The top two e-retailers accounting for about 70 of the e-retail industry revenue generate about half of their sales through group companies. Following the restriction on equity ownership in sellers e-retailers will need to make changes in their supply chain and may alter business model in several ways including adoption of franchisee model thereby leading to increase in the cost of compliance as they strive to adhere to revised guidelines in less than 40 days. Between fiscals 2014 and 2018 e-retail in India grew at 40 a year to reach Rs. 1 lakh crore way faster than BMs growth at 13 during this period that scaled to Rs 3.2 lakh crore. The strong growth in e-retail was driven by deeper market penetration and attractive pricing compared with BM retailers said Gautam Shahi Director CRISIL Ratings. Robust FDI inflows of over Rs 95000 crore in the past four fiscals have made this possible. Given tightened regulatory policy and a probable moderation in revenue growth for e-retailers compared with the past FDI inflows and consequently discounting by e-retailers may see moderation in fiscal 2020 providing a more level playing field to BM retailers. However long term growth potential for Indian e-retail continues to remain strong driven by increasing internet penetration growing household private final consumption expenditure PFCE and convenience offered by online shopping. In the near term BM retailers would see improving revenues profitability and better cash flows thus benefitting their overall credit profiles.