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Retail
2011 will be a more challenging year due to tough comps
Sector valuation is steep; upside over 12 months limited
Gitanjali is our preferred play
2011 sector outlook
We expect 2011 to be a more challenging year for
Indian Retail, in comparison to 2010 when the
sector benefited from a) pent up demand, and b)
an uptick in consumer sentiment, which resulted
in 15-20% same-store-sales (SSS) growth,
coupled with margin expansion. In 2011, we
expect SSS growth to decelerate (mid-high single
digit), and very modest margin expansion.
Our concern on general retailers continues to be
their return metrics (ROE/ROIC), which at c10-
15% are equivalent to their cost of capital. As
such, global retailers operate either on low
margins and low working capital or high margins
and high working capital. However, Indian
retailers tend to operate on low margins and high
working capital. We do not foresee any imminent
change, and therefore do not view the current
business model for general retailers in India as
particularly robust. We are cautious on the retail
sector, as while growth is robust (EPS growth
forecast at 36.3% over FY10-12e), valuations are
full at 26x FY12e earnings.
2011 top pick
Gitanjali, OW, TP INR341
Notwithstanding the above, our preferred play in
this sector is Gitanjali, a gems and jewellery
player with interests in India and abroad, and in
segments of diamonds and jewellery. This
company is on a high growth trajectory (40% EPS
growth FY10-13e) and is available at reasonable
value (5.1x EV/EBITDA on FY12e EBITDA
compared to 17.6x for Shoppers Stop and 21x for
Titan). Moreover, the company is benefiting from
margin expansion in the diamond jewellery
segment (from 3% to 4-4.5%) on account of
increased prices and higher margins.
Gitanjali is concentrating on building a strong
retail platform in India (which will improve
margin mix) and it has a strong India branded
jewellery sales base (INR18bn in FY10, growing
at 25-30%). We also expect an improvement in
working capital intensity of the business, as the
recovery in global liquidity increases the velocity
of money and hence reduces debtor days.
We have valued the company at 6x EV, and
expect quarterly results to be a stock catalyst. Our
multiple is at a discount to Shoppers Stop’s target
multiple of 10x and Pantaloon’s target multiple of
9.5x to account for the volatility in Gitanjali’s
business and lower return ratios.
India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details �� ��
Retail
2011 will be a more challenging year due to tough comps
Sector valuation is steep; upside over 12 months limited
Gitanjali is our preferred play
2011 sector outlook
We expect 2011 to be a more challenging year for
Indian Retail, in comparison to 2010 when the
sector benefited from a) pent up demand, and b)
an uptick in consumer sentiment, which resulted
in 15-20% same-store-sales (SSS) growth,
coupled with margin expansion. In 2011, we
expect SSS growth to decelerate (mid-high single
digit), and very modest margin expansion.
Our concern on general retailers continues to be
their return metrics (ROE/ROIC), which at c10-
15% are equivalent to their cost of capital. As
such, global retailers operate either on low
margins and low working capital or high margins
and high working capital. However, Indian
retailers tend to operate on low margins and high
working capital. We do not foresee any imminent
change, and therefore do not view the current
business model for general retailers in India as
particularly robust. We are cautious on the retail
sector, as while growth is robust (EPS growth
forecast at 36.3% over FY10-12e), valuations are
full at 26x FY12e earnings.
2011 top pick
Gitanjali, OW, TP INR341
Notwithstanding the above, our preferred play in
this sector is Gitanjali, a gems and jewellery
player with interests in India and abroad, and in
segments of diamonds and jewellery. This
company is on a high growth trajectory (40% EPS
growth FY10-13e) and is available at reasonable
value (5.1x EV/EBITDA on FY12e EBITDA
compared to 17.6x for Shoppers Stop and 21x for
Titan). Moreover, the company is benefiting from
margin expansion in the diamond jewellery
segment (from 3% to 4-4.5%) on account of
increased prices and higher margins.
Gitanjali is concentrating on building a strong
retail platform in India (which will improve
margin mix) and it has a strong India branded
jewellery sales base (INR18bn in FY10, growing
at 25-30%). We also expect an improvement in
working capital intensity of the business, as the
recovery in global liquidity increases the velocity
of money and hence reduces debtor days.
We have valued the company at 6x EV, and
expect quarterly results to be a stock catalyst. Our
multiple is at a discount to Shoppers Stop’s target
multiple of 10x and Pantaloon’s target multiple of
9.5x to account for the volatility in Gitanjali’s
business and lower return ratios.
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