Budget 2011: Sartorial woes

Retailers including Pantaloons and Shoppers Stop are considering a day-long strike on Monday to protest the excise duty of 10% imposed on branded garments in the budget.

Analysts see the levy impacting the sales volumes of retailers who derive considerable revenues from private labels in the lifestyle segment.

“Retailers will have to increase apparel prices by an incremental 6%, given a 40% abatement. This will impact demand and volume growth as the sector is reeling under higher costs due to a sharp increase in cotton prices. Retailers were contemplating 12-18% price increase from April. We believe current excise hike will add to margin pressure and/or impact volume growth in the coming quarters,” Amnish Aggarwal, analyst at Motilal Oswal Securities, wrote in a budget-impact report.

The retailers have seen strong sales growth over the last three quarters, driven by revival in consumer spending, aided by discount offers and rising income levels of customers. For the December quarter, almost all the retailers reported  sales growth of over 25% year on year.

Meanwhile, better operational efficiency and cost control initiatives have resulted in strong profit growth. Net profit growth was in the 5-77% range with Pantaloon Retail weighing in lowest and Kewal Kiran Clothing the highest.

However, the operating margins have now started coming under pressure due to rising prices of cotton, apart from higher interest costs and depreciation expenses as these companies have again started engaging in adding more stores in new areas.

The excise duty hike may result in further deterioration of margins if the retailers do not pass on the full 6% hike to consumers.

The sector was looking forward to liberalisation of foreign direct investment (FDI) in multi-brand retail. Though the budget didn’t mention this, discussions are underway to liberalise the FDI policy.

Analysts expect the sector to get a boost from other initiatives allowed in the budget, like savings on tax by investing in infrastructure bonds and increase in IT exemption limits, which will leave more income in the hands of customers to spend on luxury goods and apparel. Also, the retailers would benefit from initiatives to promote cold storage and distribution.

Among the retail players, analysts remain positive on Pantaloon Retail given its relatively cheaper valuations and strong pan-India presence.