MANAGEMENT DISCUSSION  AND ANALYSIS

Global economy

Performance: The global economy continued to expand during 2014 at a moderate and uneven pace, as the prolonged recovery process from the global financial crisis was still saddled with unfinished post-crisis adjustments. Growth of world gross product was 2.6% in 2014, marginally better than the growth of 2.5% registered in 2013, but lower than the projected 2.9%. A salient feature for major developed countries during 2014 was the erratic movements in their quarterly GDP growth rates. For example, the US oscillated from a decline of 2.1% in the first quarter of 2014 to an increase of 4.6% in the second quarter, while at the same time Japan swung from a growth of 6.7% to a contraction by 7.3%. Interestingly, for the year as a whole, all major developed economies in North America, Europe and developed Asia remained on an upward growth trajectory for the first time since 2011. Conversely, the economic situation in Europe was brcarious, particularly in the Euro area, where growth is exceptionally weak, with some countries close to or already in recession.

Prospects: In the baseline outlook, further improvement is expected for developed countries, with growth projected to be 2.3% for 2016. This outlook is brmised on a set of assumptions and subject to a number of uncertainties and downside risks. The global economy is expected to strengthen in the following two years, with WGP projected to grow by 3.3% in 2016.

Challenges: Global recovery was hampered by some new challenges, including a number of unexpected shocks. Many developing countries and economies in transition appeared vulnerable to a tightening of global financial conditions and to the risk of a sharper-than expected slowdown in major emerging economies, as well as a further aggravation of geopolitical tensions and an escalation of the Ebola epidemic. Unemployment remains extremely high in many countries in the region and headline inflation is at alarmingly low levels. In the large economies, Italy is expected to contract for the third consecutive year and France has stagnated. Growth rates in developing countries and economies in transition have become more divergent during 2014, as a sharp deceleration occurred in a number of large emerging economies, particularly in Latin America and the CIS. A number of these economies have encountered various country specific challenges, including structural imbalances, infrastructural bottlenecks, increased financial risks and ineffective macroeconomic management, as well as geopolitical and political tensions. Downside risks remain significant, especially in the Euro area and Japan, which have seen renewed weakness in 2014. (Source: http://www.un.org)

Global retail industry The global retail landscape has transformed as emerging markets become more stable, and the consumers living in these regions evolve to become sophisticated and conscious shoppers. As per a recent study by A.T. Kearney, China ranks first as its retail market has grown imbrssively, toppling the US. In fact, it is soon slated to become the world’s largest market and Asia in totality outpaced other emerging markets, to emerge as the regional winner for 2015, even though it had slowed in growth over the last few years.

A major theme running through this year is that luxury retail continues to show strong growth and is serving as the impetus for growth across several sectors. In Asia, despite considerable political and economic turbulence, luxury brands continue to enter markets at a steady pace.

Across the world, the past year also brought a continuation of the imbrssive growth of retail e-commerce. Sales increased more than 20% worldwide in 2014 to almost $840 billion. Perhaps the biggest exbrssion of this boom was in the stock markets, which gave e-commerce companies skyrocketing valuations. This was highlighted by Alibaba’s record-setting $25 billion initial public offering in September, which valued the China-based company at about US$170 billion.

Overall, Asia’s e-commerce market size is now US$525 billion, surpassing North America which generates US$483 billion in online sales.

Prospects: By 2022, China’s retail market is expected to be double that of the United States and grow to $8 trillion, according to a new report by A.T. Kearney. Leading this growth should be the luxury sector and e-commerce. Reports claim that Asia’s e-commerce retail sales may grow as much as 25% per year. Luxury is to remain a ‘bright spot’ due to wealthy individuals being less vulnerable to economic troubles than the general public, as well as the development of malls catering to consumers with disposable incomes who are increasingly mobile. With a strong GDP growth and an expanding middle class, Sub- Saharan Africa is a source of great potential for retailers in this segment.

Challenges: With each market, a new challenge is brsented due to the unique economic climate and consumer patterns which force retailers to curate consumer experiences based on region, rather than take a global approach.

Fundamental infrastructure challenges — logistics and transportation in Brazil, government regulations in  

Argentina — may hinder e-commerce growth in the future.

Indian economy

The economy of India is the seventh largest in the world by nominal GDP and the third largest by purchasing power parity. The full-year GDP growth for the fiscal year ending in March 2015 settled at 7.3%, up from 6.9% in 2013-14, a tad lower than an official estimate of 7.4%.

India overtook China to become the world’s fastest growing economy by clocking 7.5% GDP for the March quarter, outstripping China’s 7% growth in the same quarter and beating a Reuter’s poll of economists who forecast 7.3% growth.

Agriculture grew at 0.2% in 2014-15 as against 3.7% in the brvious fiscal, while mining and quarrying grew a mere 2.4% compared to 5.4% a year ago. In contrast, trade, hotels, transport, communication and services relating to broadcasting grew at 10.7% while financial, real estate and professional services grew at 11.5%.  

India’s current account deficit shrunk to some 1.3% of GDP and could well narrow further to 1% of GDP next fiscal, meaning that capital inflows would be more than that needed to finance the current account deficit, adding to reserves, putting upward brssure on the rupee and on interest rates, when RBI buys dollars to stem apbrciation and then sells bonds to sterilise the rupees injected in this fashion.

Foreign direct investment is likely to have hit a high of $34.9 billion in financial year 2015, a massive 61.6% from $21.6 billion in the brvious fiscal, according to a report by Japanese brokerage firm, Nomura. According to the report, the FY2015 inflows re 1.7% of the GDP, up from 1.1% in the brvious year.

Indian retail industry

The Indian retail industry has brsently emerged as one of the most dynamic and fast paced industries as several players have started to enter the market. It accounts for over 10% of the country’s aggregate GDP and around 8% of the employment in India. The country is today the fifth largest global destination in the world for retail. In market potential, India ranks seventh (after China, US, Canada, UK, Brazil and Germany).

The country ranks fourth among the surveyed 30 countries in terms of global retail development. The current market size of Indian retail industry is about US$ 520 billion (Source: IBEF). Retail growth of 14% to 15% per year is expected through 2015. By 2018, the Indian retail sector is likely to grow at a CAGR of 13% to reach a size of US$ 950 billion. The sector is experiencing exponential growth, with retail development taking place not just in major cities and metros, but also in Tier 2 and Tier 3 centres.  

Healthy economic growth, changing demographic profile, increasing disposable incomes, changing consumer tastes and brferences are other factors driving growth in the organised retail market in India. Increasing participation from foreign and private players has given a boost to the retail infrastructure. India’s price competitiveness attracts large retail players to use it as a sourcing base.

The sector can be broadly divided into two segments: value retailing, which is typically a low margin-high volume business (primarily food and groceries) and lifestyle retailing, a high margin-low volume business (apparel, footwear, among others). The sector is further divided into various categories, depending on the types of products offered. Food dominates market consumption with 60% share, followed by fashion. The relatively low contribution of other categories indicates an opportunity for organised retail growth in these segments, especially with India being one of the world’s youngest markets

Year 2014-15 at a glance India had the highest number of retail outlets in the world at over 13 million retail outlets in 2014. It also has the highest number of outlets (11,903) per million inhabitants. The various major retail formats in India include departmental stores, hypermarkets, supermarkets/ convenience stores, specialty stores and ‘cash and carry’ stores.

The retail spending in the top seven Indian cities of India currently amounts to Rs.3.58 trillion (US$ 57.56 billion), with organised retail penetration at 19% in 2014. The Indian retail industry in the single brand segment has received foreign direct investment equity inflows to the tune of US$ 275.38 million in the period April 2000-January 2015, according to the Department of Industrial Policies and Promotion.  

Growth drivers

Increasing discounts: A significant trend emerging in the retail sector is the increase in sales during discount seasons. This is prompting retailers to start discounts earlier and have longer on-sale seasons.

Luxury retailing: Luxury retailing is gaining importance in India. This includes fragrances, gourmet, accessories, and jewellery among many others. The Indian consumer is ready to splurge on luxury items and is increasingly doing so.

The Indian luxury market is expected to grow at a rate of 25% per annum. This will make India the 12th largest luxury retail market in the world.

Rural retailing: Rural retailing is another area of prime focus for many retailers. Rural India accounts for two-fifths of the total consumption in India. Thus, the industry players do not want to be left out and are devising strategies especially for the rural consumer.

Greater urbanization:

Higher brand consciousness, increasing number of HNIs and changing consumer brferences are all results of the ongoing urbanisation spurt that works as a major catalyst to boost the retail industry. India’s consumer class is estimated to grow nearly 12-fold – from 50 million at brsent – to 583 million by 2025, with more than 23 million people likely to be listed among the world’s wealthiest citizens.

Rising expenditures:

An increase in the young working population, especially women, with rising incomes and increasing purchasing power fuel the sector. Consumer expenditure is estimated to be USD 3.6 trillion by 2020 vis-à-vis USD 977 billion in 2010, at a CAGR of 13.9%.

Easier loans: With the emergence of concepts like quick and easy loans, EMIs, loans through credit cards and loans over phones, it has become easier for the Indian consumer to buy out-of budget products.

Development of real estate: Real estate development in the country, for instance, the construction of mega malls and shopping malls, is augmenting the growth of organised retail business.

Opportunities

FDI reforms: The Government has introduced reforms to attract FDI and to boost investor sentiment. Government has provided 51% FDI in multi-brand retail.

Rising consumer confidence: A recent report by Nielsen puts India on top of the consumer confidence index – there are growing disposable incomes coupled with optimism about the future.

Exploitation by global players: Several corporates have planned to exploit the opportunities in the Indian retail space, such as Reliance Industries Ltd (RIL), which has lined up capital expenditure of Rs.1.8 trillion (US$ 28.94 billion) for the next three years for its petrochemicals, telecom and retail ventures.

Goods and Service Tax:

The Government of India is also in the final phase of talks with the states for the Goods and Services Tax Bill to be implemented. This Bill is seen as a key to facilitating industrial growth and improving the business climate in the country.

SETU scheme: Allocation of Rs.1,000 crore to create a Self-Employment and Talent Utilisation scheme will boost young entrebrneurs.

Reduction in excise duty:

50% reduction in excise duty on leather footwear of retail sale price exceeding the value of Rs.1,000 is among one of the major announcements of this budget.

Boost to SME sector: The Government’s announcement about MUDRA bank with a H20,000 crore corpus will give a significant boost to the SME sector and small entrebrneurs.

Reduction in tax for technical services: A big push to technology has been given by the government with its decision to reduce the tax on royalty and fees for technical services from 25% to 10% apart from setting up a ‘startup fund’ for technology based startups with an initial corpus of Rs.1,000 crore.

Cashless economy:

Incentivising credit or debit card transactions to move towards a cashless economy, new laws to curb black money and focus on skill development across ministries are other areas from which the retail industry will indirectly benefit.

Ease of doing business:

The Government’s continued focus on ease of doing business will help the retail industry tremendously. This will also encourage State Governments to bring in similar provisions and help in driving investment-led growth.

Reduction in custom and excise duty to support

‘Make in India’: The budget supports the ‘Make in India’ initiative through reduction in custom duty on certain inputs to address the problem of duty inversion and reduce the cost of raw materials, coming as a breath of fresh air for the retail industry.

Outlook

Retail industry in India is expected to grow to US$ 950 billion from approximately US$ 520 billion in 2015 by 2018, registering a CAGR of 8.9% by 2018. The online retail market is expected to grow from US$ 3.1 billion to US$ 22 billion (from 10% to more than 15% of the organised retail market) during FY13-FY18.

Also, organised retail is expected to grow at a rate of 25% per annum. While the overall retail market will grow at 12% per annum, modern trade will grow twice as fast at 20% per annum, and traditional trade at 10%, according to a report by Boston Consulting

Group and Retailers Association of India. India is expected to become the world’s fastest growing e-commerce market on the back of robust investment activity in the sector and the rapid increase in internet users. It is expected that India’s e-commerce market will grow from US$ 2.9 billion in 2013 to over US$ 100 billion by 2020.

More Indians are slated to start shopping online, with a projection of 200 million new consumers by 2017, according to a report released last year by Accel India.

Cumulative FDI inflow in retail for April 2000–October 2014 was USD 274.6 million; this is expected to increase when increasing FDI in multibrand retail is approved.

Risk management and internal control

Effective governance comprises competent management, implementation of standardised policies and processes, appropriate audit programme and combrhensive risk monitoring.

The Company formulated a combrhensive risk management framework with a standardised definition of internal controls. It provided a framework for risk management and regulatory compliance, which required risk assessments and related policies, a control-based environment, information and communication procedures and an integrated monitoring mechanism.

The Company strengthened its system of controls for reporting various transactions, ensuring operational efficiency and compliance with relevant regulations commensurate with the size and nature of its business. These internal control procedures ensured the efficient use and protection of resources, compliance with policies, procedures and statutes as well as accuracy and promptness of financial reporting.

All operating parameters were monitored and controlled, with material deviations from the annual planning and budgeting and business outlook including capital expenditure reported to the Board on a quarterly basis. Reports of internal auditors were reviewed by the Audit Committee and corrective measures were taken to catalyse improvements in systems and procedures.

The Board recognised the work of the auditors as an independent check on the information received from the management related to the performance of the Company.

Cautionary statement

This discussion contains certain forward-looking statements based on assumptions and current situations and expectations. The various risks and uncertainties associated thereto could cause the actual results to differ materially from those projected in forward-looking statements. Market data and product information contained in this report is gathered from published and unpublished reports and their accuracy cannot be assured. The management reserves every right to revisit any brdictive statement as may be deemed fit.