HDFC Sec: Buy Shoppers Stop: Growth aggression…

Shoppers Stop: Growth aggression…
Shoppers Stop is quickly ramping up its floor area in major retail markets,
particularly in 35 cities with million plus population. In 2014-15, the company plans
to have a gross floor area of 3.9 million square feet with 135 standalone stores.
The business continues to rely on branded apparel. There is scope to push high
margin private labels. We initiate coverage with a BUY and a price target of
Rs.778.
Value unlocking: Subsidiaries
Shoppers Stop has raised its stake in Hypercity, its hypermarket or large-box
format, from 19% to 51% for Rs.1250 million. During Q1 2010-11, Hypercity did
net sales of Rs.1298.1 million. Going forward, the company plans to add 4-5 stores
every year. By 2014-15, Hypercity will have 26 stores with an estimated gross
floor area of more than 2 million square feet. The company expects the business to
be EBITDA positive in 2012-13. The hypermarket business is targeting the
untapped fresh and general merchandise category. We expect this business to
unlock huge value going forward.
Margins will hold…
During 2009-10, company’s EBITDA margins have returned to 7-8% range. Over
the last few years, the company’s raw material costs have been trending down.
From a high of 69% in 2004-05, raw material costs are now 65.6% of sales.
Between 2006-07 and 2009-10, consignment sales increased from 26% of overall
sales to 40%. Moreover, apparel now constitutes 59% of sales from 65% during
2004-05. There is room for increase in gross margins due to efficiency and vendor
management.
Over the last few years, lease rental costs have increased significantly. Going
forward, out of the 24 properties that the company will open, 12 are on revenue
share model. On top of this, depreciation costs have been pruned to industry
standards. The company is likely to bear a 110 bps hit on service tax on rent and
other inputs. However, introduction of GST in 2011-12 will help in neutralizing the
impact.
Valuation
In our view, Shoppers Stop is set for explosive growth in the coming few years.
The hypermarket business is scalable with very strong value creation possibilities.
The company has raised capital for increasing its stake in Hypercity and expanding
the business. Shoppers Stop is trading at a P/E of 20.6x and 15.1x for FY12 and
FY13 respectively. The EV/EBITDA for the stock is 10.7x and 8.4x. We like the
aggressive growth and initiate coverage with a BUY and a price target of Rs.753.