Retailing Sector Analysis Report 

High-potential Stocks: Top 2 Nifty Contenders

• The Indian retail sector in India is emerging as one of the largest sectors in the economy. It contributes 10% to the GDP and 8% to the employment. The country's per capita retail store availability is also among the highest in the world.
• There are four major retail formats within the industry - mono/exclusive branded retail shops (exclusive showrooms owned or franchised out by a manufacturer), multi-branded retail shops (focus on particular product categories and carry most of the brands available), convergence retail outlets (display most of convergence as well as consumer/electronic products), and e-retailers (online shopping facility for buying and selling products and services.
• India's retail sector is experiencing exponential growth with retail development taking place not just in major cities and metros, but also in tier II and III cities. Healthy economic growth, changing demographic profile, increasing disposable income, urbanization, changing consumer tastes and preferences are some of the factors driving this growth.
• Increasing participation from foreign and private players has given a boost to Indian retail industry making India the fifth largest and preferred retail destination globally. India's price competitiveness also attracts large retail players to use it as a sourcing base. Global retailers are increasing their sourcing from India and are moving from third-party buying offices to establishing their own wholly owned/wholly managed sourcing and buying offices in India.
• The Government of India has approved 51% FDI in multi-brand retail and 100% FDI in single-brand retail under the automatic route with plans to allow 100% FDI in e-commerce. Cumulative FDI inflow in retail stood at US$ .17 billion between April 2000 to June 2020.
• To provide a level playing field to stakeholders, the government is also planning to synchronize policies of retail, FMCG and e-commerce with a single policy framework.

• Supply
• The supply in the retail industry has increased now that the industry is leveraging e-commerce, which allows companies to spend less on real estate while reaching out to more customers in Tier II and Tier III cities. Supply is also influenced by some international players entering domestic markets.
• Demand
• Growing urbanization, increasing disposable incomes, changing demographic profile, changing consumer tastes and preferences are driving demand in retail market in India.
• Barriers to entry
• Low. However, players need to establish strong distribution channels and achieve economies of scale to compete.
• Bargaining power of suppliers
• Low, as retailers have low switching costs. Larger retailers can easily switch to different suppliers.
• Bargaining power of customers
• High, as consumers are price sensitive and have information about the product and its price. Low switching costs also gives customers high bargaining power
• Competition
• The Indian retail sector is highly fragmented, which increases competition. Entry of foreign players in the market and e-retailers have also intensified competition within the sector.
• Threat of Substitutes
• Low. However, customers may purchase products from a local store instead of purchasing from a retailer.

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• In FY20, organized retail contributed about 11-12% of the overall retail industry. This share is expected to increase to 16% over the next 5-6 years, with the organized retail market growing at a CAGR of 20%. Interestingly, over the last five years, the organized retail market grew at 19%, increasing its penetration from 7% to around 11%.
• Online media also emerged both as a strong influencer as well as a buying channel. E-commerce accounted for nearly a third of several electronic categories, almost half of smartphones sold, and about a fifth of all apparel sales in India.
• Unfortunately, the retail sector was among the hardest hit sectors by the Covid-19 outbreak. According to the Retailers Association of India (RAI), only 7-8% of the retail industry functioned after the lockdown selling just essential items.
• While some of the categories (essential items) were affected due to inventory issues, several other categories ran into severe supply issues and therefore stock out situations, as manufacturing almost came to standstill for various categories.
• Fashion, furniture, electronics, luxury retailers and automobiles were the hardest hit as consumers forewent discretionary purchases in favour of stocking up on food and household supplies.
• Retailers and manufacturers also faced supply chain bottlenecks because of disruption from Chinese vendors. In June 2020, local traders' body Confederation of All India Traders (CAIT) called for a boycott of over 450 categories (3000 items) of Chinese goods over continued border clashes between India and China.
• The list released by CAIT broadly included everyday items, including FMCG products, consumer durables, toys, furnishing fabrics, textiles, builder hardware, footwear, apparel, kitchen items, handbags, cosmetics, electrical and electronics, fashion apparel, among others.
• Covid-19 also brought changes in the spending patterns of consumers along with some long-term lifestyle changes. In food staples, the major emerging trends were around the reduced need to 'touch and feel' products at the time of purchase and increase in focus on brand led quality assurance.
• Retail technology investments were made in order to continue digital transformation efforts, as retailers reserved capital for technology investments by reducing spending on store openings and remodels.
• Analysis of key macro-economic trends suggests that consumption will recover steadily, and retail sales are poised for a comeback. India's demand growth is expected to be north of 10% over the long term.

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• The Indian retail industry has been on a growth trajectory over the past few years. Concepts such as online retailing and direct selling are becoming increasingly popular in India thereby boosting growth of the sector.
• One of the major areas supporting the retail growth in India is the e-commerce industry. As per the Indian Brand Equity Foundation, India is expected to become the world's fastest growing e-commerce market, driven by robust investment in the sector and rapid increase in the number of internet users.
• India's e-commerce market is expected to reach US$ 99 billion by 2024, growing at a CAGR of 27% over 2019. This will come on the back of faster speeds on reliable telecom networks, faster adoption of online services, variety of choice, convenience, etc. Online penetration of retail is expected to reach 10.7% by 2024 versus 4.7% in 2019.
• There is also an upward trend seen in modern retailing driven by urbanization. There are more than 500 operational shopping malls in India having thousands of brands across food, fashion and lifestyle which are offering best of national and international brands to better educated consumers.
• Omni-channel also offers a seamless experience to the customers across various channels, whether brick & mortar, online stores, etc. This strategy makes a brand always available to the customer and gives an impetus to sales by increasing visibility, consumer base across various geographies. It also optimizes inventory holding costs, operating costs and real estate cost. With modern retail gaining ground in India, there remains a lot of scope for omni-channel to expand.
• The organized Indian retail industry has begun experiencing an increased level of activity in the private label space and is forecast to witness strong growth in the coming years.
• Luxury retailing is also gaining importance in India. This includes fragrances, gourmet retailing, accessories and jewellery among many others. The luxury market in India is expected to grow supported by the growing exposure of international brands among Indian youth and higher purchasing power of the upper class in Tier I and Tier II cities.

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When is a good time to invest in the retail sector?

As the demand for retail is closely linked to the economy, retail stocks are usually riskier - their fortunes are prone to economic booms and busts. For this reason, they are often called cyclical stocks. Generally considered an offensive tactic in investing, cyclical stocks can be used to generate high returns when the economy is doing well.

Therefore, the best time to buy such stocks (retail stocks) is at the start of an economic expansion and the best time to sell them is just before the economy begins to slow down.

Where can I find a list of retail stocks?

The details of listed retail companies can be found on the NSE and BSE website. However, the overload of financial information on these websites can be overwhelming.

For a more direct and concise view of this information, you can check out our list of retail stocks.

Which retail stocks were the top performers over the last 5 years?

Titan and V Mart Retail were the top retail performers over the last 5 years in terms of sales and profit growth.

Titan's growth can be attributed to the company's leadership position in the organized jewellery, watches and eyewear segments, supported by its strong brands, wide distribution and service networks and diversified product portfolio in terms of price points and styles. Titan is a part of the TATA Group of companies, which lends it strong financial flexibility while also supporting its brand equity and customer acceptance of new product launches.

V Mart Retail has also done well on the back of its diversified product portfolio across various segments along with its wide geographic presence with most of its stores in tier-II and tier-III cities. The company also has an established relationship with a wide vendor base, which optimizes cost mix and a strong financial profile with absence of any term loans and strong debt protection metrics.

To know which other companies performed well over the last 5 years, check out our entire list of top performers.

What kind of dividend yields do retail stocks offer?

There is no consistent trend of dividends across the industry, with different companies having different dividend policies.

For more details, check out our list of top retail stocks offering high dividend yields.

Which are the retail stocks with the highest return on capital employed (RoCE)?

Return on capital employed (ROCE) is a financial ratio that can be used in assessing a company's profitability and capital efficiency by determining how well the management is able to allocate capital for future growth. An RoCE of above 15% is considered decent for companies that are in an expansionary phase.

Titan and V Mart Retail are the top retail stocks right now on the Return on Capital Employed (RoCE) parameter.

To know which other retail stocks offer great return on capital employed, you can check out the top retail stocks offering the best RoCE here.

Which are the best retail stocks to invest in currently?

Investing in stocks requires careful analysis of financial data to find out a company's true worth. However, an easier way to find out about a company's performance is to look at its financial ratios.

Two commonly used financial ratios used in the valuation of retail stocks are -

• Price to Earnings Ratio (P/E) - It compares the company's stock price with its earnings per share. The higher the P/E ratio, the more expensive the stock.

  To find stocks with favorable P/E Ratios, check out our list of retail stocks according to their P/E Ratios

• Debt to Equity Ratio (D/E) - It compares the company's debt to the shareholder's equity. A debt to equity ratio less than 1 indicates that the portion of assets provided by shareholders is greater than the portion of assets provided by creditors and vice versa.

  Retail stocks, given high the cash flow volatility, tend to be extremely risky if they have a high debt to equity ratio. So, a low debt to equity ratio is a key criterion for buying a retail stock.

  To find stocks with D/E Ratios below 1, check out our list of retail stocks according to their D/E Ratios