Post demonetisation organised retail sector likely to post low single digit growth in Q3 FY17: India Ratings

Post demonetisation organised retail sector is expected to post low single digit growth with varying impact across different sub-sectors in the October-December quarter of fiscal year 2016-17 (FY17), said India Ratings and Research (Ind-Ra) in its latest report on Friday.

In a surprise move to curb black money, corruption and terrorism, prime minister Narendra Modi announced scrapping of old currency notes of Rs 500 and Rs 1,000 as legal tender from circulation whereby resulting in cash crunch across the country. 

According to the ratings agency recent report, the market had expected the organised retail sector to witness contraction in the third quarter (Q3) of FY17 .

"Ind-Ra believes the impact of demonetisation across retail segments will vary, depending on the nature of consumption (discretionary/non-discretionary), ticket size and ease of adoption of alternate modes of payment,"it said. 

After the government's announcement of demonetisation of high value denomination notes, consumers due to cash crunch shifted their modes of payments to credit cards, debit cards and digital whereby going to retailers who possessed point-of-sale (POS) machines or digital payments platform like Paytm. 

ALSO READ: India abolishes larger banknotes in fight against graft, 'black money' 

The ratings agency expects organised retailers in the food, grocery and fashion retail segments to remain unaffected by the government's demonetisation drive.

"Organised retailers in the food, grocery and value to premium fashion retail segments have been insulated from the influence of demonetisation in Q3 FY17, given the relatively low average ticket size of transactions (around Rs 2,000) and the willingness of consumers to switch to cashless transactions," Ind-Ra said in a note.

However, for organised retailers selling expensive items such as jewellery, watches, among others are expected to face contraction in their income or revenue earnings in Q3 of FY17.

"...For segments of high value, namely jewellery, luxury items (watches), consumer durables where the transaction value is high and the purchases are more discretionary in nature and presumably the use of unaccounted for money is higher, even organised retail is likely to report de-growth in Q3 FY17," it added. 

Similarly, due to weak consumer demand on the back of demonetisation organised retail jewellers are predicted to report minimal growth to de-growth in revenues in Q3 FY17. 

Ind-Ra said, "Margins are also likely to be impacted given the high operational leverage in the segment; albeit supported by higher gold prices for most part of the demonetisation period. Companies are cautious on restocking to reduce any liquidity pressure which may arise due to reduced offtake." 

Despite demonetisation, one sub-sector of organised retail, which is likely to report good growth in Q3 FY17  is Fashion Retail sector, said the ratings agency.

As per the Ind-Ra report, Organised Fashion Retailers are projected to report high single digit to double digits in Q3 FY17 on the back of festive season and early commencement of end of season sale in December 2016. 

Most of these departmental stores are located in metros and Tier-I and Tier-II cities where consumers were readily shifting to card payments; resulting in the share of cards as a percentage of revenue increasing to 80% to 90% in the last quarter (averages around 40%-50%), it added. 

ALSO READ: Personal care products may clock single digit declines in Q3 sales despite demonetisation