Investors' expectations for retail companies on the Bombay Stock Exchange have outpaced even the consumer boom. That has made most retail stocks far too costly to attract new investors, Indian analysts and international fund managers say.
India-based investment professional and IndiaStockBlog contributor Radha Kota, summarizes an article on India's retail sector by Eric Bellman of the Wall Street Journal. He reserves his own opinions for a separate article, to be posted here.
Are Indian Retail companies too expensive with Pantaloon gaining whopping 1500 percent and Trent gaining 250 percent in last 5 years and trading at very high P/E levels? How are growing competetion, tight margins and foreign investment competetion affecting this sector?
Indians are shopping like never before. Rising salaries, low interest rates and new malls have made shopping the favorite pastime of India's burgeoning middle class. But investor enthusiasm for the sector has kept share prices of India's handful of listed retailers at levels higher than prospective earnings warrant, analysts say.
Some of the fund managers, who expect cutthroat competition among retailers to begin squeezing their margins soon, think the retail sector shares are too expensive. Most of the shares are trading at price/earnings ratios of more than 50 for the year that will end March 31, 2006 compared with the broader market's current average P/E ratio of about 15.
Another reason for the overexuberance in the sector is the hope that India will open retailing to foreign direct investment as early as this year. While global retailers, including Wal-Mart Stores of the U.S. and Carrefour of France, are interested in coming to India, laws currently block them from setting up shop. The government has said it plans to ease restrictions, so some investors are betting on Indian retail stocks today in hopes that these will become takeover targets once foreign investment is allowed.
Another risk the article discusses is that even as Indian retailers spend millions opening stores and distribution systems, they are still just starting to figure out what the new Indian consumer really wants to buy. Provogue, for example, has only about 20 outlets -- a number it plans to triple in the next two years. Analysts say such companies have yet to reach the sweet spot in their growth cycle where their capital expenditures are coming down and they have calculated the most profitable products to pitch.
[WSJ; paid subscription required; Investor Enthusiasm Keeps Indian Retail Shares Expensive: By Eric Bellman; Summary by Radha Kota]