HDFC Sec: Retail Sector : From street to stores

Retail players under our coverage expanded at a robust 47.3% revenue
CAGR over FY05-10, led by increasing penetration. We now forecast 30%
revenue CAGR over FY10-13 led by (a) food and grocery and (b) store
expansion. Between FY11-13, Hypercity and Star Bazaar will double their
gross area (0.8 to 1.5-1.6msqft/each) while Pantaloon’s FVRL will add
twice the size of these two put together (at a base of 7.6msqft). We also
expect efficiencies to improve, led by improvement in fill and sell-through
rates and investments in IT and back-end infrastructure. We initiate
coverage with BUY on Pantaloons and Shoppers Stop and HOLD on Trent
Retail sales under coverage to grow by ~30% CAGR between
FY10 - FY13
• Since FY05, consolidated revenue of listed retailers under our coverage has
grown at a CAGR of 47.3%. Even so, share of organized retail in India is ~5%
• Over the next decade, we expect organized retail to grow at a CAGR of 18-
20%. By FY21, organized retail sales will be USD 168 billion compared to USD
19.7 billion today
• Between FY10 and FY13, we expect standalone profits of retailers under our
coverage to increase at a CAGR of 59.2% compared to 31.5% increase
between FY05 and FY10 led by higher sales per square feet and efficiencies
Food, general merchandise will be the driver
• By FY15, India’s food consumption market will be USD 155 billion followed by
fruits and vegetables at USD 123 billion. With a huge market size and
negligible presence of organized retail, food retailing will be the growth driver
• Food and grocery retailing is characterized by gross margins of 10-15%.
Private label brands have a margin of ~25%. Private labels will help retailers
in maintaining margins
• Retailers are targeting consumers through convenience stores, supermarkets
and hypermarkets. In particular, hypermarkets are the flavor of the season.
Retailers under our coverage have subsidiaries targeting this segment. We
expect these subsidiaries to generate substantial value
Efficiency, efficiency and efficiency
• Indian retailers have grown at a frantic pace. Going forward, we expect
growth with efficient operations. For instance, Walmart turns its inventory
12.3 times in a year compared to 2.5 for Pantaloon’s value retail business
• EBITDA margins will improve due to lower rental costs and higher sales per
square feet. Already fill rates of Pantaloons have improved to 90% from 70%