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Retail Sector Initiating Coverage 24th Nov 2007
Retail Sector Initiating Coverage 24th Nov 2007
BLB Research
Research – A Passion
Retail Sector
Deepika Bhatia
deepika@blblimited.com
91-9811418866
Table of Contents
Page
No.
I Executive Summary ...................................................................................................... 3
II Background .................................................................................................................... 4
III Global Scenario ............................................................................................................. 5
IV Indian Retail Scenario................................................................................................... 7
V Retail Formats................................................................................................................. 13
VI Growth Drivers.............................................................................................................. 15
VII SWOT Analysis.............................................................................................................. 17
VIII Challenges....................................................................................................................... 19
IX Investment Universe .................................................................................................... 22
X Company Analysis
Pantaloon Retail ................................................................................................ 23
Trent .................................................................................................................... 25
Shoppers’ Stop .................................................................................................. 27
Provogue ............................................................................................................ 29
Vishal Retail ..................................................................................................... 31
Koutons Retail ................................................................................................. 33
Executive Summary
The retailers in India have to learn both the art and science of retailing by closely following how
retailers in other parts of the world are organizing, managing, and coping up with new challenges
in an ever-changing marketplace. Indian retailers must use innovative retail formats to
enhance shopping experience and try to understand the regional variations in consumer
attitudes to retailing.
Retail marketing efforts have to improve in the country:
3. Monitoring customer needs constantly must be done with long-term relationships in view.
The above are some of the aspects which Indian retailers need to focus upon on a more pro-
active basis.
Growth Drivers for the Organised Retail are identified over here:
Background
Retailing is more than Retailing consists of the sale of goods or merchandise, from a
fixed location such as a department store or kiosk, in small or
selling goods individual lots for direct consumption by the purchaser. Retailing
is a well recognized business function which compromises
making available desired product in the desired quantity at the
desired time. This creates a time, place and form utility for the
consumer. The success of retailing is highly dependent on an
efficient supply chain management. A well-developed supply
chain reduces wastages and transaction cost thereby reducing the
cost of inventories to be maintained by the producers and the
traders. A reduction in the cost of inventory management leads to
a reduction in the final price to the consumer.
Global Scenario
The Global retail Industry is one of the largest industries
worldwide, increasingly being controlled by a handful of
Retail issues in developed powerful corporations based mainly in the U.S and Europe,
markets around the globe namely, Wal-Mart, Tesco, Carrefour and Metro. These MNCs
basically will be a mirror retailers have by and large have saturated in their home countries
and are looking for penetrating emerging markets of India, China
image of issues confronted
and Russia as they are minimally penetrated by organised retail.
by the U. S. economy-aging Shopping will become more experiential; eating, being
populations, shrinking entertained and “living” the shopping experience will take on
share of retail spending and prominence. The global market will grow rapidly in our flat
world, with markets such as China and India granting access to
increased spending on
the world’s best retailers.
healthcare.
Retailing in United States
In Contrast, populations in China had initially restricted FDI in retailing to only joint
developing markets will ventures at 49 percent foreign holding and only at
remain relatively young and specified locations subject to a ceiling on the number of
stores.
will increase share of retail Malaysia, Indonesia, Thailand and Japan have enforced
spending zoning restrictions for mega-retailers.
There are minimal capital requirements for foreign
retailers in Sri Lanka.
The Philippines has imposed “sourcing” and reciprocity
requirements on foreign retailers.
In Japan, mega-retailers must seek the views and
permission of small local stores before opening a new
store.
In the US, major cities such as Los Angeles, California,
Chicago and New York City have restricted the opening
of Wal-Mart stores within city limits.
France enacted the Raffairin Act that regulates the growth
55%
40%
30%
15%
4%
Organised Unorganised
Global Players operating in India:
History
Retailers in India have to
experiment with formats Traditionally Indian Retail can be traced back from Weekly
maintaining scalability in Markets, Melas, Village Fairs in Small towns and villages to
terms of segments, along Kirana stores, PDS outlets, Khadi Bhandaar, co-operative stores
in Urban cities. The wave of retail began with various textile
with deepening penetration
manufactures like Bombay Dyeing, Raymonds, S Kumar’s, and
levels Grasim foraying into selling the product through their outlets
and competition among FMCG players driving the forces
towards retailing.
Retail-a boom
India (2006)
Segmental Growth
Apparels
Apparel is the most Clothing and textile is a large organised vertical dominated by
organised segment textile manufacturers Raymond, Bombay Dyeing, Vimal, and by
big retailers like Pantaloon, Pyramyd, Koutons having ~16.4
penetration level. Increasing disposable incomes and change in
the lifestyle needs has pushed the segment.
Home décor will expand at The demand for furnishing is going to be spearheaded by a huge
highest pace demand for the real-estate, paving way to tap the unorganised
segment. Presently only a few players like Gautier, Godrej, &
Durian function as organised entities.
Beauty Care
Hectic lifestyle will govern The organised players in Beauty Care are HLL (Lakme Salons),
concern for Grooming Marico (Kaya), Health and Glow are having a huge growth
impetus.
Footwear
Footwear is largely
organised segment Leaving aside the Apparel, Footwear segment is forming a big
pie in the organised retail sector, expected to grow to greater
heights with foreign payers like Crocs Inc.
200000
150000
Retail Volume (Rs. Cr.)
100000
50000
0
2007-08E
2008-09E
2009-10E
2010-11E
2011-12E
2005-06
2006-07
Year
20%
15%
30%
Franchise
Franchise route involves granting of rights by one party,
the franchiser to another, the franchisee in return for a
sum of money. The franchisee is allowed to conduct
business using the franchiser’s know-how and brand
name. There are various levels of franchisee: Unit
franchisee, multiple franchises, master franchisee and
regional franchisee. The foreign players which have
opened franchisee across various verticals of fast food,
apparels, and entertainment are Nike, Pizza Hut, Subway,
Tommy Hilfiger, Marks and Spencer, Swarovski and
Hugo Boss.
Joint Venture
Multi National like McDonalds, Reebok, Wal-mart have
entered into joint venture with Indian companies with
share not exceeding 49 percent.
Manufacturing
The foreign manufactures sets up its Indian unit to
manufacture and forward integrated to retailing its
products like Bata and Benetton.
Retail Formats
Kiranas
These are food and non-food neighborhood counter
Conventional Formats stores, also called ‘mom and pop stores’ in western
countries. These are big chunks forming the segregated
and unorganised retail segment. These are family-owned-
and-run retail-outlets picking the goods from wholesalers
totaling to around 12 million stores across India.
Mandis
These are the largest chunk of unorganised retail catering
to urban and rural masses. Mandis are physically located
at different regions to enhance convenient shopping. The
sellers bring across various products like eatables,
vegetables and fruits, pulses, cereals, spices etc. The most
prominent of them are sabzi mandis found in most of the
localities across India.
Village Haats
This form is operating in rural areas where buyers and
sellers gather once in a week or month from nearby
villages and small towns to cater their livelihood and
leisure needs. These haats are a source of entertainment
and socialization among rural masses.
Push Cart Vendors
The are categories of vendors roaming from door to door
in various localities selling fruits, vegetables, and other
eatables, from which mostly housewives makes purchases
that too on credit.
In the long run, both traditional and modern retail formats will
co-exist providing the benefits of both the formats. Organised
retail will dominate the traditional formats, which will fall under
the new evolving hub-and-spoke, and cash-&-carry models.
Hub-and-spoke Model
Growth Drivers
The use of plastic money in the form of debit and credit cards has
expanded multifold in last 5 years. The number of credit cards
has grown at a CAGR of 28 percent and debit cards galloped by
140 percent. The customers have adopted the habit of electronic
payments and leveraging their pockets shifting from basic needs
to lifestyle products.
SWOT Analysis
Challenges in India
Retailing as an industry in India still has a long way to go. To
become a truly flourishing industry, retailing needs a few
changes in regulations and functions:
Automatic approval not permitted for foreign investment
in retail.
Regulations made to restrict real-estate purchases, and to
over-come cumbersome local laws.
Taxation that favors small retail businesses.
Presence of developed supply-chain and integrated IT
management.
Increase in trained work force.
Intrinsic complexity of retailing – rapid price changes,
constant threat of product obsolescence and low
margins.
Investment Universe
Company CMP EPS 07 A EPS 08 E EPS 09 E EPS 10 E P/E P/E P/E P/E Target Recommendation
(in Rs.) (in Rs.) (in Rs.) (in Rs.) (in Rs.) 07 08 09 10
Pantaloon 659 8.18 14.12 22.59 36.14 80.67 46.72 29.20 18.25 903 Buy
Trent 533 22.39 19.87 25.84 33.59 23.83 26.84 20.65 15.88 839 Buy
Shopper’s
511 6.94 9.98 13.97 19.56 73.65 51.26 36.61 26.15 488 Buy on dips
Stop
Provogue 995 10.02 13.14 19.71 29.57 99.31 75.75 50.50 33.67 739 Buy on dips
Vishal 690 13.64 23.69 28.42 34.12 50.64 29.15 24.29 20.24 853 Buy
Koutons 721 12.62 16.48 26.38 42.20 57.18 43.76 27.35 17.09 1,055 Buy
Jun-07
Jul-07
Aug-07
Sep-07
Oct-07
Nov-07
subsidiary companies.
Plans to spend Rs. 800 Crore to have 10-11 million sq. ft
space for the year ending June FY08.
Close Price BSE_SENSEX
Home solutions Segment will most likely break even this
year, and will affect bottomline going forward.
The company holds 74 percent in future capital holding,
which is coming out with Intial Public Offering and
expected to possible value unlocking of investment.
Concern
Valuation
The stock is trading at Rs.659 discounting FY10E earnings by
P/E(x) of 18. The earning is expected to grow at a CAGR of 64
percent for FY07A-FY10E. We initiate buy on the stock with a
target price of Rs. 903.
(Rs. in million)
EPS
Year Equity Net Sales EBIDTA PAT (Rs) P/E
2006A 268.85 18,677.71 1,462.38 641.58 4.77 138.20
2007A 293.50 33,256.11 3,076.22 1,199.92 8.18 80.67
2008E 301.50 53,209.78 3,192.59 2,128.39 14.12 46.72
2009E 301.50 85,135.64 5,108.14 3,405.43 22.59 29.20
2010E 301.50 136,217.03 8,173.02 5,448.68 36.14 18.25
(Source: Company, BLB Research)
Jun-07
Jul-07
Aug-07
Sep-07
Oct-07
Valuation
(Rs. in millions)
Net EPS
Year Equity Sales EBIDTA PAT (Rs) P/E
2006A 144.28 3,464.41 441.04 251.28 17.42 30.63
2007A 157.61 4,557.80 642.29 352.86 22.39 23.83
2008E 194.94 7,748.26 852.31 387.41 19.87 26.84
2009E 194.94 10,072.74 1,108.00 503.64 25.84 20.65
2010E 194.94 13,094.56 1,440.40 654.73 33.59 15.88
(Source: Company, BLB Research)
Concern
May-07
Jun-07
Jul-07
Aug-07
Sep-07
Oct-07
Valuation
The stock is trading at Rs.511 discounting FY10E earnings by
P/E(x) of 26. The earning is expected to grow at a CAGR of 41
percent for FY07A-FY10E. We initiate buy on the stock with a
target price of Rs. 488.
(Rs. in millions)
Net EPS
Year Equity Sales EBIDTA PAT (Rs) P/E
2006A 343.83 5,881.86 565.82 271.05 7.88 64.88
2007A 348.27 8,279.76 716.61 241.85 6.94 73.65
2008E 348.51 11,591.66 927.33 347.75 9.98 51.26
2009E 348.51 16,228.33 1,298.27 486.85 13.97 36.61
2010E 348.51 22,719.66 1,817.57 681.59 19.56 26.15
(Source: Company, BLB Research)
Concern
May-07
Jun-07
Jul-07
Aug-07
Sep-07
Oct-07
Valuation
(Rs. in millions)
Net EPS
Year Equity Sales EBIDTA PAT (Rs) P/E
2006A 161.98 1,564.08 208.93 119.43 7.37 135.02
2007A 190.98 2,390.24 337.49 191.45 10.02 99.31
2008E 190.98 3,585.36 501.95 250.98 13.14 75.75
2009E 190.98 5,378.04 752.93 376.46 19.71 50.50
2010E 190.98 8,067.06 1,129.39 564.69 29.57 33.67
(Source: Company, BLB Research)
Aug-07
Sep-07
Oct-07
Nov-07
Concerns
Valuation
Oct-07
Oct-07
Nov-07
Nov-07
Valuation
(Rs. in millions)
Net EPS
Year Equity Sales EBIDTA PAT (Rs) P/E
2006A 49.90 1,583.50 256.70 132.20 26.49 27.23
2007A 273.40 4,024.00 715.00 344.90 12.62 57.18
2008E 273.40 6,438.40 1,094.53 450.69 16.48 43.76
2009E 273.40 10,301.44 1,751.24 721.10 26.38 27.35
2010E 273.40 16,482.30 2,801.99 1,153.76 42.20 17.09
RESEARCH TEAM
P. N. Panda Head Research pnpanda@blblimited.com 011-233527459
Amit Kumar Tiwari Media & Entertainment amitkumartiwari@blblimited.com 011-233527459
Deepika Bhatia Retail deepika@blblimited.com 011-233527459
Jagvir Singh Faujdar Banking jagvirfauzdar@blblimited.com 011-233527459
Jaisheel Garg Power Jaisheel.garg@blblimited.com 011-233527459
Lalit Chaudhary Hospitality lalitchaudhary@blblimited.com 011-233527459
Nidhi Parvani Metals nidhi.parwani@blblimited.com 011-233527459
Sachin Bansal FMCG sachin@blblimited.com 011-233527459
Sameer Randive IT, Telecom sameer@blblimited.com 011-233527459
Samyukt Agrawal Infrastructure samyukt@blblimited.com 011-233527459
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