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CESC Limited
Market ascribes value to retail peers with similar strategies
Event
After meeting with some of Spencer’s peers, such as Pantaloons (PF IN,
Rs275, Not rated) and Shopper’s Stop (SHOP IN, Rs340, Not rated),
strategies for their hypermarket business appear similar, confirming that a
focus on food retail and top-line growth is most likely the key to profitability
and efficient working capital management.
On our forecasts the market is pricing in a negative valuation for CESC’s retail
business, while clearly ascribing value to its peers such as Big Bazaar
(Pantaloons) and HyperCITY (Shoppers Stop). Trading on 0.7x FY12E
consolidated P/BV and 11x FY12E PER, we think there is value upside for
CESC on any re-rating of the retail business.
Impact
Takeaways from competitors include:
Top-line growth the key, new stores... peers are trying to grow the top
line via new store expansion. Spencer’s guidance on store expansions to
FY14 (29% CAGR) is between Big Bazaar (15%) and HyperCITY (35%).
….and same store sales growth: with Spencers retail management
expecting ~15% same store sales growth over the next couple of years,
vs the more ambitious same store sales growth of 17-20% from its peers.
Core focus on food: despite being a lower margin product segment, it is
much more scalable to achieve top-line growth, with the opportunity to
achieve negative working capital due to higher inventory turnover (vs
apparel/electronics), ~75% of Spencers turnover is food, vs. HyperCITY
at 60% and Big Bazaar at ~30%.
Forecasts not pricing in any potential industry catalysts: such as benefits
from the introduction of GST (which will allow greater back-end consolidation)
and any relaxation on FDI, currently prohibited for multi-brand retail, as
recommended in the recent Economic Survey 2010-11 (capital+expertise).
Earnings and target price revision
No change.
Price catalyst
12-month price target: Rs384.00 based on a Sum of Parts methodology.
Catalyst: the retail business reports annually. We expect losses of around
Rs.1.5bn in FY11, down from Rs.2.5bn in FY10, driving yoy earnings growth.
Action and recommendation
Outperform. CESC is trading at a 21% discount to our SOTP valuation, which
includes a negative valuation of Rs52/share for Spencer’s.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
CESC Limited
Market ascribes value to retail peers with similar strategies
Event
After meeting with some of Spencer’s peers, such as Pantaloons (PF IN,
Rs275, Not rated) and Shopper’s Stop (SHOP IN, Rs340, Not rated),
strategies for their hypermarket business appear similar, confirming that a
focus on food retail and top-line growth is most likely the key to profitability
and efficient working capital management.
On our forecasts the market is pricing in a negative valuation for CESC’s retail
business, while clearly ascribing value to its peers such as Big Bazaar
(Pantaloons) and HyperCITY (Shoppers Stop). Trading on 0.7x FY12E
consolidated P/BV and 11x FY12E PER, we think there is value upside for
CESC on any re-rating of the retail business.
Impact
Takeaways from competitors include:
Top-line growth the key, new stores... peers are trying to grow the top
line via new store expansion. Spencer’s guidance on store expansions to
FY14 (29% CAGR) is between Big Bazaar (15%) and HyperCITY (35%).
….and same store sales growth: with Spencers retail management
expecting ~15% same store sales growth over the next couple of years,
vs the more ambitious same store sales growth of 17-20% from its peers.
Core focus on food: despite being a lower margin product segment, it is
much more scalable to achieve top-line growth, with the opportunity to
achieve negative working capital due to higher inventory turnover (vs
apparel/electronics), ~75% of Spencers turnover is food, vs. HyperCITY
at 60% and Big Bazaar at ~30%.
Forecasts not pricing in any potential industry catalysts: such as benefits
from the introduction of GST (which will allow greater back-end consolidation)
and any relaxation on FDI, currently prohibited for multi-brand retail, as
recommended in the recent Economic Survey 2010-11 (capital+expertise).
Earnings and target price revision
No change.
Price catalyst
12-month price target: Rs384.00 based on a Sum of Parts methodology.
Catalyst: the retail business reports annually. We expect losses of around
Rs.1.5bn in FY11, down from Rs.2.5bn in FY10, driving yoy earnings growth.
Action and recommendation
Outperform. CESC is trading at a 21% discount to our SOTP valuation, which
includes a negative valuation of Rs52/share for Spencer’s.
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