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Retail
As against the mild recovery seen in the global economy, the
Indian economy has shown good growth on account of strong
government spend, low dependence on exports and rising
consumerism in India. The Indian economy has steadily
recovered to pre-2007 levels and economists across the board
expect GDP growth of around 9% levels for the next decade.
The Private Final Consumption Expenditure (PFCE) is expected
to reach about $1trn (`5,000,000cr) by CY2020. Key growth
drivers for the same include investments in infrastructure by the
government and private sector, which would propel earning
power of the Indian consumer. Rising income levels are likely to
boost consumption in the country and in turn lend a boost to
the modern retail trade. Thus, investments are likely to boost
consumption and vice-versa is also likely to be true.
The retail consumption trends remained upbeat in both the rural
and urban households in 3QFY2011. The quarter saw the Diwali
festival being celebrated towards early November compared
to mid-October. Pertinently, majority of India's retail sales take
place during the festival season and Diwali being one of the
biggest festivals, it bring a lot of cheer for the retailers. This
Diwali particularly, the mood was quite upbeat compared to
2008 and 2009, when most global economies including India
were reeling amidst the throes of the economic downturn. This
time round, the retailers were pleasantly surprised to see growth
exceeding their expectations in certain areas. Consumers were
upbeat in their spending, not only in apparel and fashion items,
but consumer durables and home improvement products as
well. These categories were incidentally the most affected last
year, as there was a decline of business in the home retail
category. Thus, with the economic revival gathering steam, we
expect the retailers to experience better times going ahead.
In this context, we believe that the organised retail sector is
currently at inflexion point, and is ready to take the next leap of
growth at a steady and stable pace. We maintain that the
segment has tremendous growth potential, and accordingly we
expect it to capture 10% share of the overall retail sector over
the next 4-5 years.
Expansion but with a cautious approach
Overall, optimism was also visible in the space booking done
by the retailers during the quarter. Markets witnessed strong
space booking not only from the domestic retailers, but
international too albeit with a cautious approach. We believe
that the mood on the street is buoyant on account of the
sustained strong industrial production (IIP) figure and resulting
increase in consumer spend.
As per the recent CB Richard Ellis report, developers have
chalked out aggressive plans to build 90 new malls and take
the grand total to 280 by the end of 2012. India is likely to add
5 million square feet (mn sq ft) in 2010 and another 15mn sq
ft is likely to be added by 2012. Of the total addition, Bangalore
forms the largest share with 70%.
Although the retailers have gone aggressive in space booking,
it has been done with a very cautious approach post the learning
phase for the retailers during the recessionary times of 2008
and 2009. Developers are also a more knowledable clan now
and have started appreciating the retailers' matrix (footfalls,
tenant mix and conversion rates) while commencing projects
and approaching tenants. Many developers have changed the
rental model from fixed to revenue share, which is more
acceptable to the retailers. We believe that the change in strategy
signals evolution in the business model that allows more flexibility
to the retailers in developing their business. This is because
rental is a key cost component in the retail business, which had
witnessed stunning increase during the pre-recession era. As a
result, during the recession, rentals plunged 30-40% across
cities, which is now stabilising
Value retailing maintains positive momentum
The value retailing segment is expected to have witnessed robust
growth during 3QFY2011, despite the high food prices. Value
retail formats such as Big Bazaar, Food Bazaar, More and D'Mart
tried to cushion the impact of inflation on demand by stepping
up bargains and discount offers across product categories that
have been hit hard by the spiraling prices. Pantaloon Retail
(PRIL) reported 12.5% growth in value retailing in 1QFY2011,
and we expect the segment to register higher double-digit growth
in 2QFY2011. Overall, major players in the value retailing
segment, including PRIL, Reliance Retail, Spencer's and More
stand to benefit from this ongoing trend.
Lifestyle retailing on a roll
Stable economic conditions and a pick-up in consumer
confidence resulted in consumers opening up their wallets for
purchasing lifestyle goods during the quarter. PRIL reported
21.7% growth in lifestyle retailing in 1QFY2011, which is
expected to register higher double-digit growth in 2QFY2011.
Proposal to ease FDI rules in retail - Positive for sector
The concept note on allowing 51% FDI in multi-brand retail
continues to be at the discussion stage. The department of
industrial policy and promotion (DIPP), under the commerce
ministry, is seeking comments on putting an FDI cap on multibrand
retail, which is currently banned. The paper, however,
remains silent on the quantum of FDI cap, even after the draft
paper had proposed 51% FDI in multi-brand retail.
We concur with the industry experts that enabling FDI would be
good for the sector, as it will result in increased employment
and higher level of consumerism, on account of a substantial
range of competitively priced products. The government also
stands to benefit from this, as the exchequer would receive
increased collections, since the large organised trade players
are tax-compliant, contribute robust tax revenue and are unable
to avail exemption limits. On the supply-chain front, we believe
wastage in farm-to-fork will reduce with the transfer of
technology used by the global players.
According to a recent research by Crisil, the entry of FDI in
multi-brand retail has the potential to bring down prices of
perishable goods such as fruits and vegetables over the long
term. The report states that an efficient supply chain will enable
the large retailers to source fruits and vegetables directly from
the co-operatives and in turn lower the annual wastage
amounting to around `630bn. Wastage in the supply chain
and commission to trade intermediaries inflate the final price
paid by the Indian consumers. They shell out almost 2-2.5x the
price a farmer gets as compared to 1-1.5x in developed markets,
where penetration of organised retail is much higher. As per
the research, the overall investment required to set-up the supplychain
infrastructure for fruits and vegetables would be close to
Rs650bn over the medium term. This is estimated after taking
into consideration the number of cold storage facilities and
refrigerated trucks that would be required for handling
perishable goods. About 30% of the country's total production
of fruits and vegetables is wasted every year because of
inadequate cold storage and transport facilities.
Retail stocks marginally outperform Sensex
Most stocks in the retail sector marginally outperformed the
Sensex during October -December 2010. While Shoppers Stop
(SSL) outperformed the Sensex by 12%, Titan beat the Sensex
by 8%. However, retail major, PRIL, underperformed the Sensex
by around 26% during the mentioned period.
3QFY2011 expectations
An upbeat festive season during the quarter leading to increased
footfalls and consequently higher sales per sq ft, coupled with
ongoing cost-rationalisation measures are likely to benefit the
retail players. We expect value retailing to further strengthen,
while lifestyle retailing is likely to maintain its growth trajectory.
We expect our coverage universe to report top-line growth of
52% yoy. We estimate Shoppers Stop to lead our universe with
70% yoy growth in top-line for the quarter.
On the margins front, we expect PRIL and SSL to register a yoy
decline of 60bp and 310bp in OPM, respectively. However, the
higher growth in top-line is expected to cushion the impact of
the increase in fixed cost. We expect NPM to increase by a
marginal 35bp yoy.
Outlook and Valuation
With the economic recovery gathering steam, coupled with the
revived consumer sentiment amidst the Diwali festival during
the quarter under review, footfalls registered an upward trend,
resulting in an increment in same store sales (SSS) and the sales
per square feet (SPSF) of the retailers. We expect the trend to
continue and strengthen going ahead, thereby keeping the
long-term growth prospects intact for the organised retail
segment in India. We expect organised retail to post a CAGR of
31% over the next five years.
The value retailing segment is likely to lead the growth over the
next few years, as more and more consumers are expected to
go for value-for-money-goods. However, we expect the lifestyle
retailing segment growth to pick-up on the back of stable
economic conditions. Players like PRIL, who are straddled across
the price and product points, are expected to benefit both in
the short and long term. Overall, retail continues to be one of
the fastest growing sectors in India and we remain positive on
its growth prospects.
PRIL continues to be our preferred pick
On account of being present across price points and categories,
we believe that PRIL is better-placed than its peers. Apart from
the cost-rationalisation measures, the company's restructuring
initiatives would also enable it to enhance its focus on the
different segments and provide it a good opportunity for value
unlocking. At `367, the stock is trading at 19.8x FY2012E
earnings and 2.1x FY2012E P/BV. Our sum-of-the-parts target
for PRIL is `469, wherein we have valued its stake in FCH, HSRIL
and Future Bazaar at `31, `12 and `18, respectively. PRIL
continues to be our top pick in the retail sector and recommend
a Buy on the stock.
Titan has a stable and niche business model. In the jewellery
segment, Titan had witnessed a dip in volumes earlier, as
demand fell due to the higher gold prices. However, the falling
rate of decline in volumes indicates that the consumers may be
adjusting to the high prices and do not expect gold prices to
correct significantly. The company's watch segment is performing
well, while the other segments are also expected to turn in a
good performance, as there has been a revival in the demand
for lifestyle category goods. At `3,601, the stock is trading at
35.8x FY2012E earnings and 12.2x FY2012E P/BV. Owing to
rich valuations, we remain Neutral on Titan.
We expect SSL’s performance to improve in the ensuing quarters
on the back of pick-up in consumer demand for lifestyle retailing.
At `748, the stock is trading at 36.3x FY2012E earnings and
5.8x FY2012E P/BV. In view of the recent run-up in the price,
we remain Neutral on SSL.
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