Why FDI in retail will only result in a short-term bounce

Markets today closed lower for the fifth consecutive day with the BSE ending 100 points lower at 16,775.87, its lowest close since October 18, with 19 of its components closing in the red, while the 50-share NSE index closed down 0.75 percent at 5,030.45 points.

The market managed to narrow down its losses but the undertone continues to remain nervous as it was simply short covering that led to the market rally. Hence the volume in the market was still low, says Firstpost Investing Editor Shishir Asthana.

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Among the gainers Pantaloon Retail today edged up 13.5 percent while Shoppers Shop was up by 5.9 percent at Rs 360.50. Though debt is a major problem for Pantaloon retail, there was good overall buying in the market today. And the stock went up considerably in the last 30 minutes of trading primarily on the likelihood of an FDI announcement in the retail sector.

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However, foreign investment in the sector will only result in asset creation and not benefit the companys as such. This is because structurally the sector is weak as margins and sales are under pressure. Unless a strategic investor comes in, that is a retail giant like Walmart, the cost of raw materials will continue to remain high and there will be no demand for retail stocks.

Hence the announcement of a 100 percent FDI in single retail brands will only result in a short-term bounce.

Meanwhile, capital goods took a beating and were down 4 percent.Larsen & Toubro, India’s largest engineering conglomerate, and state-run power gear maker Bharat Heavy Electricals (BHEL) were two of the biggest fallers in the benchmark index, and touched a new 52 week low as news of CAG raising questions of UMPP projects led to a feeling of further delays in the sector. Both firms cautioned on order book inflows for the current fiscal year to March 2012 as part of their September-quarter earnings announcements.

In the aviation sector, Jet Airways and Kingfisher Airlines were up almost 19 percent on rumous of government allowing FDI in the aviation sector.However given the problems in the aviation sector there are two scenarios that need to be looked at carefully.

A strategic investor would want control of the functioning of the airline. A mere 24 percent stake cap as proposed by the aviation ministry will not attract strategic investors as they will have no control over the airline.

On the other hand, airlines could consider allowing PE investments where investors will pool in money but will take a backseat when it comes to operations.

For more, listen to our market wrap below: