X

Sign up for Equitymaster's free daily newsletter, The 5 Minute WrapUp and get access to our latest Multibagger guide (2017 Edition) on picking money-making stocks.

This is an entirely free service. No payments are to be made.


Download Now Subscribe to our free daily e-letter, The 5 Minute WrapUp and get this complimentary report.
We hate spam as much as you do. Check out our Privacy Policy and Terms Of Use.
FDI in retail: The argument continues - II - Views on News from Equitymaster
 
 
  • PRINT
  • E-MAIL
  • FEEDBACK
  • A  A  A
  • Mar 31, 2011

    FDI in retail: The argument continues - II

    In our earlier article in this series we have discussed the key logic for allowing foreign investment (FDI) in Indian retail sector. We now take the discussion forward to dwell on the key positives and negatives of the proposal and how are they likely to impact investor returns.

    Why FDI?

    40% of the food produced in the country gets wasted. This is while a third of the country’s population cannot afford two square meals a day. Agreed, having large shopping malls and MNC retail outlets may not solve this problem. However, investments in the retail supply chain and storage could certainly help in finding a solution for preserving critical food produce. Global retailers have the necessary know how and expertise to build that infrastructure. But the bait that could lure them to markets like India is higher profit sharing and that too in an economy where a billion plus people are looking to consume more. And that is the key underlying rationale for FDI in retail.

    In food retailing, better supply chain and technical knowhow would ensure that the transit of produce from farm to shop floors is smooth. With the elimination of middlemen, the prices will also be reduced thereby benefitting the consumer. Contract farming will benefit the farmers. Better prices for their farm produce and timely sale of the perishable goods can help the agriculturists earn more.

    For the more established and multi format retailers, FDI will mean ready availability of equity funds without taking the risk of excess leverage. The funds will help in executing their expansion plans and thereby offer better revenue visibility. Also in times of stress, a number of retailers have had to shut shop for want of funds and excess leverage. The foreign partnership can help resolve this issue besides helping to set up a strong back-end infrastructure.

    Why not FDI?

    Now with everything going in favour of the foreign partnerships, one would wonder what can go wrong. The policymakers concerns arise due to the possible fate of smaller family managed businesses (kirana shops) that may cease to exist. The inability of the smaller players to fetch better prices from large vendors and operate on thin margins could lead to their extinction. Besides unemployment, the ability of the small format stores to reach out to the rural masses may also be compromised upon. Hence the government needs to ensure that the FDI does not bring any undue favour only to the larger players.

    It is also argued that the global retailers will initially reduce prices drastically with a view to oust local competition. Once they have successfully established their operations, they would raise back the prices.

    What will FDI in retail mean for investors?

    For one we do not believe that 100% FDI in retail will come anytime soon. For as long as the economies of scale help the retailers make decent margins the foreign investments can be restricted to limited few. However, a gradual and partial opening of the sector is what the industry players are advocating for. Rightly so! The investments in supply chain and storage will not only help the retailers expand and improve margins but will also help the smaller players fetch better bargains. At the same time this could solve the problem of wastages. What is more, the benefit of lower costs could then be passed on to consumers in the form of reduced prices of goods.

    Thus investors can certainly look forward to increased foreign participation in the Indian retail sector. But do look out for players that have the long term interests in mind. That is the ones who are not just setting up more shops but also ensuring that the back end infrastructure is in place, more importantly, ones that are doing so without excessive leverage. We believe the Indian retailers can duplicate the Walmart story only by strengthening their own infrastructure; rather than relying too much on foreign players.

    FDI in retail The argument continues Series - Previous | All Articles

     

     

    Equitymaster requests your view! Post a comment on "FDI in retail: The argument continues - II". Click here!

      
     

    More Views on News

    Titan: Jewellery Business Lights up the Quarter (Quarterly Results Update - Detailed)

    Aug 10, 2017

    However, growth at these levels are unlikely to be sustainable.

    Avenue Supermarts Ltd. (IPO)

    Mar 7, 2017

    Equitymaster analyses Initial Public Offering (IPO) of Avenue Supermarts Limited.

    Titan: Beating the Demonetisation Blues (Quarterly Results Update - Detailed)

    Feb 14, 2017

    Titan Industries declared its results for the third quarter of financial year 2017 (3QFY17). While topline growth was 14.7% YoY, net profit grew by 13.1% YoY during the quarter. Here is our analysis of the results.

    Titan: Margin Improvement Saves the Day (Quarterly Results Update - Detailed)

    Nov 16, 2016

    Titan Industries declared its results for the second quarter of financial year 2017 (2QFY17). While topline growth was flat, net profit grew by 23.5% YoY during the quarter. Here is our analysis of the results.

    Titan: High Gold Prices Spoil the Show (Quarterly Results Update - Detailed)

    Aug 9, 2016

    Titan Industries declared its results for the first quarter of financial year 2017 (1QFY17). The company reported 3.3% YoY increase in sales, while net profit fell by 16.3% YoY during the quarter.

    More Views on News

    Most Popular

    Demonetisation Barely Made Any Difference to Tax Collections(Vivek Kaul's Diary)

    Aug 7, 2017

    The data tells us quite a different story from the one the government is trying to project.

    Proxy Plays: A Smart Way to Bet on 'Off Limits' Companies(The 5 Minute Wrapup)

    Aug 4, 2017

    The small-cap space is full of small players that are clear proxies to great growth stories and Indian megatrends.

    Should You Invest In Bharat-22 ETF? Know Here...(Outside View)

    Aug 8, 2017

    Bharat-22 is one of the most diverse ETFs offered so far by the Government. Know here if you should invest...

    Signs of Life in the India VIX(Daily Profit Hunter)

    Aug 12, 2017

    The India VIX is up 36% in the last week. Fear has gone up but is still low by historical standards.

    7 Financial Gifts For Your Sister This Raksha Bandhan(Outside View)

    Aug 7, 2017

    Raksha Bandhan signifies the brother-sister bond. Here are 7 thoughtful financial gifts for sisters...

    More
    Copyright © Equitymaster Agora Research Private Limited. All rights reserved.
    Any act of copying, reproducing or distributing this newsletter whether wholly or in part, for any purpose without the permission of Equitymaster is strictly prohibited and shall be deemed to be copyright infringement.

    LEGAL DISCLAIMER: Equitymaster Agora Research Private Limited (hereinafter referred as 'Equitymaster') is an independent equity research Company. Equitymaster is not an Investment Adviser. Information herein should be regarded as a resource only and should be used at one's own risk. This is not an offer to sell or solicitation to buy any securities and Equitymaster will not be liable for any losses incurred or investment(s) made or decisions taken/or not taken based on the information provided herein. Information contained herein does not constitute investment advice or a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Before acting on any recommendation, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek an independent professional advice. This is not directed for access or use by anyone in a country, especially, USA or Canada, where such use or access is unlawful or which may subject Equitymaster or its affiliates to any registration or licensing requirement. All content and information is provided on an 'As Is' basis by Equitymaster. Information herein is believed to be reliable but Equitymaster does not warrant its completeness or accuracy and expressly disclaims all warranties and conditions of any kind, whether express or implied. Equitymaster may hold shares in the company/ies discussed herein. As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here. The performance data quoted represents past performance and does not guarantee future results.

    SEBI (Research Analysts) Regulations 2014, Registration No. INH000000537.

    Equitymaster Agora Research Private Limited. 103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India.
    Telephone: +91-22-61434055. Fax: +91-22-22028550. Email: info@equitymaster.com. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407
     

    Become A Smarter Investor In
    Just 5 Minutes

    Multibagger Stocks Guide 2017
    Get our special report, Multibagger Stocks Guide (2017 Edition) Now!
    We will never sell or rent your email id.
    Please read our Terms

    MARKET STATS