MicroEconomics

Industry Selected : Retail Industry

Retail Industry Analysis

Overview of the Industry –

The Indian FMCG industry is the 4th largest globally. Sales of personal and domestic care
products make up 50% of this sector’s sales. The consumer-packaged goods (FMCG)
business showed indications of improvement in the July-September 2020 quarter, with a
growth of 1.6% over the previous year, following a decrease of 19% in the previous quarter
(January-March 2020). The economy as a whole became more open and constraints were
relaxed, one indicator of how well it was doing was the development of the fast-moving
consumer goods (FMCG) industry. The growth of the fast-moving consumer goods (FMCG)
sector was also a sign of how the economy as a whole was doing as it became more open and
restrictions were eased. Retail infrastructure will get better if the foreign and private sectors
get more involved. It is forecasted that the industry for online retail in India will grow from
$55 billion in 2021 to $350 billion by the year 2030.
Reasons for selecting this industry for our analysis –
1. Increased Demand –

As a result of increased demand from end users, the retail sector in India was able to
attain 96% of its pre-COVID-19 sales in September 2021, as reported by the Retailers
Association of India (RAI). The rise in consumers' purchasing power is directly
responsible for the increase in demand.

2. Innovation in Financing –

Consumers now have the ability to purchase long-lasting products on easy credit
thanks to the collaborative efforts of banking institutions and retail establishments.

3. Policy Backing –

About 51% of Foreign Direct Investment comes from abroad. Under the automated
approach, singular brand retail can get full FDI. The department that deals with the
promotion of industry notified that it was working on a platform that would make it
easy for the businesses and government to follow the rules.

4. Increasing Investment –

Retailers from other countries are now operating in the Indian market. Between 2000
and 2021, an amount of 572.8 billion US Dollars was raised through foreign direct
investment in India. During the same period, 3.75 billion Dollars were raised by the
Retail sector alone.
Transformation of India's retail sector –
 Pre 1990’s - The manufacturers opened up their very own retail locations.
 1990 – 2005 - Pure-play merchants saw the opportunity that this industry presented
and entered it. The lion's share in the clothing market sector.
 2005 – 2010 - Food and general merchandise categories get Indian investment.
Established competitors repositioned to compete in India's top 100 cities.
 From 2010 to March 2021, cumulative FDI inflows totalled $3.47 billion. Retail 2020
introduced concepts such as retrospect, reinvention, and rewriting, as well as
movement to smaller cities and rural areas. By 2020, the industry would have more
than 5-6 companies with revenues exceeding $1 trillion, opening the door to large-
scale entry by multinational brands. In addition to this, the percentage of foreign
direct investment (FDI) that can be approved for use in multi-brand retail stores has
been raised to 51%, and the rules for supermarket sourcing and investment have been
streamlined.

Government Initiatives to support the Retail Industry –

 Revising Supply Chain Structure –

It is expected that the implementation of the Goods and Services Tax (GST), which
will provide an integrated tax framework, will result in a re-evaluation of the current
procurement and distribution arrangements. The elimination of excise taxes on goods
would result in an increase in available cash.

 Cash Flow –

Tax rebates on items acquired for resale imply a substantial decrease in distribution
inventory costs. Before remitting it to the government at the end of the tax-filing
period, distributors are expected to experience cash flow from the settlement of GST
on their sales.

 System Changes and Transition Management –

Accounting and information technology systems must be modified to record

transactions in accordance with GST rules. The transition to the GST regime should
be as smooth as possible through employee training, GST compliance, customer
education, and inventory credit tracking.

 Pricing and Profitability –

It is projected that doing away with tax cascading will lower the costs of inputs and
result in an increase in profitability. Because taxes are applied at each stage of the
supply chain, profit margins will almost certainly need to be adjusted, particularly for
wholesalers and retailers.
Market Overview –
The Indian Retail industry is briskly becoming one of the most important industries in the
country. It adds ten percent to GDP and eight percent to employment levels. Because of its
big population of young adults who are potential clients, increased disposable income, and
less stringent FDI restrictions, India is poised to become an appealing market for fashion
retailers. In comparison to the same month the year before, sales at retail establishments in
India increased by 14% in October 2021. According to Kearney Research, the retail business
in India would expand at a more moderate rate of 9% between 2019 and 2030, increasing
from $779 billion in 2019 to $1,407 billion by 2026 and more than $1.8 trillion by 2030.
According to data from the Ministry of Statistics and Programme Implementation (MoSPI),
retail inflation in India rose to 5.6% year on year (YoY) in December 2021. In FY23, the RBI
says that retail inflation will be approximately 4.5%. Micro-retailers are getting closer to
normal levels of business activity as they use digital business tools to make their businesses
more efficient and help them grow. Micro-retailers are quickly adopting digital bookkeeping
solutions because they make this job easier. In addition to this, there is a demand coming
from more rural areas and smaller towns. Since COVID-19 was implemented, an increasing
number of cost-conscious online shoppers in India have been altering the dynamics of the e-
commerce retail industry, and it is expected that this pattern would continue.

India is a preferred location due to its enormous development potential in contrast to global
peers. According to a Boston Consulting Group assessment, India will be the world's third
largest consumer economy by 2025, with consumption topping $400 billion. In the FDI
Confidence Index, India ranked 15th, after the United States, Canada, Germany, the United
Kingdom, China, Japan, France, Australia, Switzerland, and Italy.
Quantitative Analysis –
For this analysis we consider the following companies with their Market Capitalization –
 HUL
 ITC
 Nestle India
 Dabur
 Godrej Consumer Products

Source: Moneycontrol

These five companies are evaluated based on five criterias: profitability, liquidity, solvency,
valuation, and efficiency. We looked at their financial ratios to decide how to rank them. The
ranks decide the score, which ranges from 1 to 5, with 5 for the best company and 1 for the
worst.
1. Profitability –

This ratio lets us understand the company's revenue and costs, which is vital for every
shareholder.

Company Return on Rank Score

Capital
Employed
HUL 38.36% 2 4
ITC 28.66% 3 3
Nestle India 147.88% 1 5
Dabur 27.29% 4 2
Godrej Consumer 19.61% 5 1
Products

The company which gave the highest return was Nestle India and the
lowest return was given by Godrej Consumer Products.

2. Efficiency –
HUL ranked first among its peers with the lowest Cash Conversion Cycle
(CCC) of negative (55.3) and received a full 5 points.

Company CCC Rank Score

(days)
HUL -55.30 1 5
ITC 38.50 5 1
Nestle India -18.38 12 4
Dabur -4.92 4 2
Godrej Consumer -8.32 3 3
Products

3. Solvency Ratio –
The debt-to-equity ratio is a type of leverage ratio that compares the total
amount of a company's debt to the total amount of equity held by its
shareholders.
HUL and ITC are the only two firms that have no debt. As a result, they
have no financial costs.

Company Debt to Equity Rank Score

 Ratio
HUL 0.00 1 5
ITC 0.00 1 5
Nestle India 0.02 3 3
Dabur 0.07 4 2
Godrej Consumer 0.19 5 1
Products
Mean 0.056 - -
Median 0.02 - -

4. Valuation –

A business that has a price-to-earnings ratio that is lower than the industry average
is deemed to be undervalued and has a significant opportunity to increase its value.
As a result, the business will receive the maximum number of points possible.

Company P/E Ratio Rank Score

HUL 71.29 4 2
ITC 18.47 1 5
Nestle India 82.46 5 1
Dabur 59.04 2 4
Godrej Consumer 59.09 3 3
Products
Mean 58.07 - -
Median 59.04 - -

ITC is awarded first place and 5 points because its PE Ratio of 18.47 is the lowest
among all competing companies.

5. Operating Turnover Ratio – Inventory Turnover Ratio –

When referring to a criterion that gauges how quickly a specific period's inventory is
sold or consumed, inventory turnover is a key indicator; a greater value indicates
better performance.

With an inventory turnover rate of 16.6, HUL was able to secure the first-place spot
and earn the maximum number of points possible.

Company Inventory Rank Score

 Turnover
HUL 16.60 1 5
ITC 5.52 5 1
Nestle India 10.19 2 4
Dabur 6.81 3 3
Godrej Consumer 6.45 4 2
Products

The Overall score stood at and were ranked in the following order –
According to the many financial parameters, HUL and ITC are the two companies
that perform the best overall.

Company Overall Score

HUL 21
Nestle India 17
ITC 15
Dabur 13
Godrej Consumer 10
Products

Conclusion –

 The retail industry is expanding at an exponential rate, and new stores are being built
in metropolitan cities as well as tier 2 and 3 cities.

 A higher level of activity has started to be experienced in the organized Indian retail
industry's private label market.

 Unlike the United States and the United Kingdom, where the private label method
accounts for 19% and 39% of sales, respectively, in the Indian market, this strategy
only accounts for 6% of sales. Shopper Stop and Lifestyle are examples of retail
enterprises that see between 15 and 25 percent of their overall earnings originate from
the sales of their own private label products.

 The proportion of goods that are sourced from India by international retailers such as
Walmart, GAP, Tesco, and JC Penney is expanding, and these businesses are moving
away from the exercise of employing third - party as purchasers in favour of
constructing their own procurement and purchasing offices that are wholly owned and
managed by the companies themselves.

 The ASSOCHAM forecasts that the Indian luxury goods market would more than
double its current value of US$ 30 billion in 2020 to reach US$ 200 billion by the
year 2030. It is projected that this rise will be supported by an increase in the
 exposure of Indian youth to global brands, as well as an increase in the spending
power of the upper middle class in cities of tiers II and III.
Annexure –
 Top 5 FMCG Stocks Quantitative Analysis - Yadnya Investment Academy
(investyadnya.in)
 Capitaline
 Indian Brand Equity Foundation (IBEF)