The retail sector in India is emerging as one of the largest sectors in the economy. It contributes 10 per cent to GDP and 8 per cent to employment.
India has occupied a remarkable position in global retail rankings. The country has high market potential, low economic risk and moderate political risk. India’s high growth potential compared to global peers has made it a highly favourable destination. According to a study by Boston Consulting Group, India is expected to become the world's third largest consumer economy by reaching US$ 400 billion in consumption by 2025.
Reliance Retail contribution
The unlisted company, Reliance Retail is among the fastest growing retailers globally; A diverse store network and wide product range should keep revenue accrual intact. By FY21, the retail vertical may constitute 50-60 percent of RIL’s cuReliance Retailent market cap.
RIL acquired Hamleys, a global retailer of toys, gifts and games in April 2019. Although the company was an exclusive franchise for Hamleys for a while, the acquisition underscores the management’s intent to explore markets beyond India. There’s also the possibility that Reliance retail’s other brands, especially private labels, may one day find a place on shelves of foreign retailers.
The unlisted company, Reliance retail has been the preferred partner for several international marquee brands in India. As of now, approximately 45 foreign retailers have entered into partnerships with this company to promote and sell their products in India.
Some noteworthy licensed brands in Reliance retail’s (one of the most active script in unlisted share market) kitty include the likes of Armani Exchange, Emporio Armani, Marks and Spencer, GAS and Superdry. Reliance Retail’s unlisted share can be traded on OTCSTOX, a live share trading platform offered by OTC Capital.
Reliance Retail’s customer loyalty programme covers more than 100 million members. This, in itself, is a large chunk of India’s consumption universe to capitalise on. In due course, evidently, these numbers are slated to grow significantly.
Retail and Jio complement each other’s growth prospects. For instance, shoppers at Reliance Retail’s numerous outlets may be able to avail of better offers if they are Jio subscribers, implying that a lot of non-Jio users may want to consider switching to Jio’s SIM card. On the other hand, those on the Jio network would get details of schemes available at Reliance Retail’s stores from time to time. As a result, they would be more inclined to shop at Reliance Retail rather than visiting stores run by some other retailer.
On an already high base, revenue growth may moderate from a quarter-on-quarter perspective. This could impact margins as well.
Consumption sentiment in the country remains subdued as of now. Weakness in demand may increase Reliance Retail’s inventory holding costs since dealers, distributors and stores may possibly slow their pace of placing new orders. Competition from other organised and unorganised players will continue to persist, Irrespective of the geographical location.
Lease rentals for commercial properties have been rising lately. Lower-than-expected asset turns, coupled with growing capex, could push downward pressure on RoCE (return on capital employed), free cash flows and earnings. A formal announcement pertaining to the launch of an all-encompassing e-commerce platform is awaited.
Though this will accelerate Reliance Retail’s revenue growth significantly, the portal will report losses in the short to medium term. This is because of high costs associated with discounts, promotions, dealer incentives, logistics, storage and competition (with well-entrenched players such as Amazon and Flipkart).
In spite of the heavy capex in connection with store openings, Reliance Retail’s operating margins increased pretty markedly compared to the competition in the fiscal year gone by. Having said that, there is scope for further improvement when compared to some of India’s other major retailers such as Aditya Birla Fashion and Retail, D-Mart, Future Lifestyle Fashions and Shoppers Stop. The contribution of Reliance Retail to RIL’s consolidated revenue and EBIT has been consistently increasing, notwithstanding some minor blips in certain quarters.
We remain optimistic about Reliance Retail’s revenue growth potential on the back of its wide store network, robust presence across diversified product categories and continued large-scale investments targeting aggressive/fast-paced expansion, this will have huge impact on Reliance retail share price.
While there’s no doubt that Reliance Retail’s revenue traction would remain steady, it will be important to keep an eye on how the margin trajectory pans out. This, in turn, would be predominantly dependent on benefits of scale and product mix.