Economy
Food retailers' losses set to grow to Rs17,000 crore by 2017
According to CRISIL while food retailers' losses will mount by about 30%, peaking in 2017 when at least half of the 10 players would break even 
 
Large-scale expansions have caused Indian food retailers an accumulated loss of Rs13,000 crore in last fiscal, says ratings agency CRISIL in a report. Among the main food retailers are Aditya Birla Retail Ltd (more), Bharti Retail Ltd (easyday), Heritage Foods  (India) Ltd (Heritage), HyperCITY Retail (India) Ltd (HyperCITY), Max Hypermarket India Pvt Ltd (Auchan), METRO Cash & Carry India Pvt Ltd (Metro), Reliance Fresh Ltd (RelianceFresh, RelianceSuper, RelianceMart, RelianceMarket), Spencer's Retail Ltd (Spencer's), Trent Hypermarket Ltd (Star Bazaar) and Wal-Mart India Pvt Ltd (Best Price).
 
"To reduce the bleeding, retailers have undertaken several initiatives, but these will yield results only gradually. Consequently, while losses will mount by about 30% over the medium term, they are likely to peak in 2017 as we foresee at least half of the 10 players breaking even by then. What keeps them going is the backing of intrepid promoters who foresee immense potential in India," it said in a report.
 
Food retailing is appealing because, despite constituting more than two-thirds of a total Rs25.3 trillion of sales in India, its penetration is a minuscule 2.3% -- the lowest among all formats. Also, it is difficult to be a leading player in organised retail in India without being present in food. Globally, food & grocery contribute to over 50% of top line for the likes of Wal-Mart Stores Inc and Tesco Plc.
 
With losses higher and time to break-even well beyond initial estimates, retailers are under pressure to streamline operating models. Anuj Sethi, director of CRISIL Ratings, “Retailers are now moving away from large-scale expansions and streamlining models to achieve faster break-evens. Exits from unprofitable categories, right sizing of stores, closure of unviable and non-performing stores, focused and calibrated expansion and a renewed focus on private labels are some of the initiatives which the analysed retailers are undertaking to achieve faster break-even.”
 
CRISIL said it believes that while these initiatives will take time and investment to yield results, players will continue to expand, thereby adding to the losses. Losses for the analysed retailers are likely to peak at Rs17,000 crore by 2017 and are expected decline thereafter as the twin benefits of size and optimised models will kick in. 
 
Ramraj Pai, president of CRISIL Ratings, said, “These losses reflect the challenges in the food and grocery retailing vertical. Compared with other formats, food retailing is a very local business where optimal supply chains are critical to lower costs. The business also has the lowest gross margins in retailing, which leads to longer gestation periods. Players, therefore, need a lot of time and investment to perfect the model and positioning (such as the location, store size, choice of products and development of private labels), and to scale up to achieve critical mass.”
 
CRISIL feels that these retailers will continue to expand backed by promoters with the wherewithal for a long ride. "We estimate as of 31 March 2014, the 10 retailers have invested about Rs19,000 crore for store additions and loss funding – through direct equity infusions, loans from banks and promoters. These are likely to continue and will help multiply the topline," it added.
 
Losses reflect difficult challenges
CRISIL said the biggest challenge for food retailers is weaning customers away from well-established local kirana stores – or mom & pops. This can be overcome only by getting a grip on local tastes and preferences. Consequently, food retailing in India is a more nuanced business than say durables or even apparel – what works in one region/locality may not work in another. 
 
According to the rating agency, the second challenge is economics: 
1. Customers are more price-sensitive. Therefore, developing an optimal supply chain that translates to lower cost of procurement is crucial 
2. Also, food & grocery has inherently low gross margins. In fact, this is among the lowest in the retailing sector. Consequently, players need to scale up by increasing stores to achieve profitability. High real estate costs add to the expansion risks Players therefore need a lot of time and investment to perfect the model and positioning (such as the location, store size, choice of products and development of private labels), and to scale up to the required critical mass.
 
Not surprisingly, gestation period in this vertical is among the highest in retailing, the ratings agency added. 

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Want to set up an NBFC? – Think again
The RBI is now singing a different tune. NBFCs have to take prior approval from RBI for any merger, amalgamation or even if any entity wants to buy 10% or more stake in the NBFC. This will make NBFCs think thrice before striking a deal involving substantial change in their shareholding
 
The whammies on the non-banking financial companies (NBFCs) sector will likely show their adverse impact on the growth of NBFCs in India. The recent regulatory amendments have left the industry baffled and quite unsure on what the regulators are intending to achieve. 
 
Firstly, the dawn of the Companies Act, 2013 (Act, 2013) which almost killed the bond market for the NBFCs. Secondly, the confusion over the Debenture Redemption Reserve (DRR) requirements created by the Ministry of Corporate Affairs (MCA), which left the NBFCs jittery with carrying out any debt issuance. Thirdly, the press release of the Reserve Bank of India (RBI) with respect to the suspension of the issuance of the Certificate of Registration (CoR) for carrying on the business of NBFI. If these were not enough, the recent amendment said it and did it all.
 
The RBI’s Non-Banking Financial Companies (Approval of Acquisition or Transfer of Control) Directions, 2014, dated 26 May 2014 requires NBFCs to procure prior written approval of RBI before any merger, amalgamation of NBFCs and even if any entity was to acquire 10% or more stakes in NBFCs. Post the recent notification the NBFCs will think thrice before striking a deal involving substantial change in their shareholding.
 
In this write up we intend to cover the impact of the latest addition to the hall of shame (that the NBFCs might want to create!)
 
What do the new directions say?
The RBI has directed all the NBFCs to obtain a prior written permission to carry out the following: 
(i) Any takeover or acquisition of control of an NBFC, whether by acquisition of shares or otherwise;
(ii) Any merger/amalgamation of an NBFC with another entity or any merger/amalgamation of an entity with an NBFC that would give the acquirer / another entity control of the NBFC;
(iii) Any merger/amalgamation of an NBFC with another entity or any merger/amalgamation of an entity with an NBFC which would result in acquisition/transfer of shareholding in excess of 10 percent of the paid up capital of the NBFC.
(iv) Approaching the Court or Tribunal under Section 391-394 of the Companies Act, 1956 or Section 230-233 of Companies Act, 2013 seeking order for mergers or amalgamations with other companies or NBFCs.
 
The RBI is very loud and clear on its language saying “all NBFCs”, which means all the NBFCs irrespective of whether it is deposit taking or non-deposit taking will have to comply with the requirements, whereas the earlier directions of 2009 with similar heading covered only the deposit-taking NBFCs. Moreover, the earlier directions covered only change in control but the scope of these directions is wider and would require the NBFCs to obtain prior written permission not just for amalgamations, mergers or takeovers but also for those investments which would transfer significant rights to rights to the investors.
 
The directions also say that these to be followed in addition to all other existing laws. So, if the NBFC is listed on any stock exchange, it will have to comply with the SEBI (Substantial Acquisition of Shares and Takeover) Regulations, 2011 and needless to say the requirements under the Companies Act, 2013 will have to be complied with by all the NBFCs. So there is also an escalation of compliance cost for obtaining investments by the NBFCs.
 
Intent of the RBI
While the RBI said in the notification that these directions would help them to ensure that the management of the NBFCs are of “fit and proper” character, but the with the nature of restriction brought in by the directions, only one question arises – Are those holding the NBFCs are more fit and more proper than those who wanting to acquire?
 
The press release, earlier this year, coupled with this recent one, do not pronounce this year to be very auspicious year for the NBFCs growth as the regulators seems to be working on cross purposes themselves. RBI neither wants us to create one, nor does it want to us to buy one leaving no room for growth horizon. If this ruthless law making continues, the day is not far where NBFC sector will witness rallies in growth trajectory. 
 
(Abhirup Ghosh is research analyst at Vinod Kothari & Company)

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COMMENTS

Maulik Sanghavi

3 years ago

I think what RBI is doing is quite sensible. NBFCs are one of the handlers of the financial markets in India. Just because existing management might not be fit, you cant allow it to be handed over to another unfit person.

It is very sensible to take the approval of RBI and most of us working practically would agree how NBFC structures are being exploited by various people.

sreenath

3 years ago

sreenath
its highly appreciable if RBI follows strict rules and those rules should be properly implemented and there should be strict controlling authrority and auditors who have appointed should be good credibility not like the previous NBFC scam where the depositors fund were looted by NBFC firm in collobration with RBi and former FM and its was he the master mind in its closure where by many middlemangement employees who have been having their lively hood had lost their job and their curse all put together that our previous FM refused to stand in the election this shows his credibility if we have such FM then our country would go to dogs but the present FM shri jatiley is for his honesty integrity and accountability we are sure that such catstrohe would not happen but the controlling institution should be watch dog of depositers

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