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Retail
The year gone by was once again very challenging for the
organised retail segment. Organised retail in India has been
growing at a strong pace, backed by enthusiasm of retailers
and investors alike in the sector. Organised retail was responsible
for bringing in the much-needed revolution in the behaviour of
Indian consumers. It helped Indian consumers become more
shopping savvy and demanding in terms of choice and product
range. However, growth in FY2011 has been mired by rising
prices both for retailers as well as consumers.
During the year, the Indian economy steadily recovered to the
pre-2007 level and economists across the board expect GDP
growth of around 8% for the next decade. During 4QFY2011,
retail consumption trends remained upbeat in both the rural
and urban households. However, the retailer faced pressure on
the margin front because of increasing raw-material prices.
Rising inflation led by higher commodity prices has put pressure
on the retailer's margin. We believe retailers across the board
would start re-evaluating their business model, the beginning
of which has already been made by Pantaloon Retail (PRIL),
which announced the restructuring of its consumer durable retail
chain, eZone, in 3QFY2011.
Cautious approach towards expansion
Overall, optimism was also visible in space booking done by
retailers during the quarter. Markets witnessed strong space
booking not only from domestic retailers but from international
retailers as well, albeit with a cautious approach. We believe
the mood on the street is buoyant due to sustained increase in
consumer spends.
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 estimated to
have added 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 of 70%.
Although retailers have gone aggressive in space booking, it
has been done with a very cautious approach post the learning
phase for retailers during the recessionary times of 2008 and
2009. Developers are also a more knowledgeable clan now
and have started appreciating the retailers' matrix (footfalls,
tenant mix and conversion rates) while commencing projects
and approaching retailers. Many developers have changed their
rental model from fixed to variable (revenue share), which is
more acceptable to retailers. We believe the change in strategy
signals evolution in the business model, which allows more
flexibility to retailers in developing their business. This is because
rental is a key cost component in the retail business, which had
witnessed a stunning increase during the pre-recession era. As
a result, during the recession, rental plunged 30-40% across
cities, and it is now stabilising.
Food retailing - The saviour
The food and grocery (F&G) segment forms a major share of
an individual's wallet. It is common knowledge that as a
consumer's earning increases, demand for better food goes up
and the per capita spend on food doubles. F&G is expected to
be at the forefront of the retail revolution. Currently, on an
average, an Indian spends around 60% of his/her earnings on
food, majorly in the unorganised retail segment, thereby offering
an immense opportunity to the organised retailer.
Currently, India is the fourth largest economy on purchasing
power parity terms and is all set to become the third largest by
2013, leaving Japan behind. It is expected that by 2013 there
will be around 300 million middle-class consumers in India
propelling growth of organised food retail in India and
facilitating it to capture a market share of 3.9% of the total
retail sector by CY2013E. Therefore, major players in this
segment, including our top pick PRIL along with Reliance Fresh,
Spencer's and Spinach, stand to benefit from such growth.
Value retailing maintains positive momentum
The value retailing segment is expected to have witnessed robust
growth during 4QFY2011, despite 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. PRIL's value retailing
reported same-store-sales growth of 11.5% in the last quarter,
and we expect the segment to register higher double-digit growth
for the quarter under review. 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
20.9% same-store-sales growth in lifestyle retailing in
3QFY2011, which is expected to come down in 4QFY2011.
Union Budget 2011: Mixed outcome
The Union Budget 2011 did not mention about FDI. However,
it did have few negative announcements such as levy of 1%
central excise and conversion of optional excise to mandatory
excise (at the rate of 10% for all garments from the earlier 4%
for cotton and 10% for others). Consequently, retailers across
the nation went on a one-day strike, which is estimated to have
cost the industry a loss of `500cr in sales.
However, there were proposals pertaining to the agri and
logistics sectors, which would in turn benefit retailers. Proposals
such as increasing agri credit, higher infrastructure outlay and
granting infra status to cold storage will bring indirect benefits
to the sector.
Retail stocks perform in line with the Sensex
Most retail stocks (excluding PRIL) performed in line with the
Sensex during the quarter. Shoppers Stop underperformed the
benchmark BSE Sensex by 1%, while Titan outperformed the
Sensex by 11%. PRIL continued its underperformance and was
down by 24% during the quarter.
4QFY2011 preview
During 4QFY2011, consumer sentiment was upbeat due to
stable economic outlook, thereby providing the much-needed
security in the minds of people. Additionally, seasonal sales
from January-February have resulted in increased footfalls and,
consequently, translated into higher sales per sq. ft. We expect
value retailing to strengthen further, while lifestyle retailing is
likely to extend its growth trajectory, as the upbeat consumer
sentiment should translate into higher demand for lifestyle
goods. We expect retail stocks under our coverage to report
top-line growth of 37% yoy. We estimate PRIL to lead our universe
with 50% yoy top-line growth.
Outlook and valuation
With economic recovery gathering steam, coupled with revived
consumer sentiment during the festive 3QFY2011, footfalls
registered an upward trend, resulting in an increment in same
store sales and per sq. ft. sales. Going ahead, we expect the
trend to continue and strengthen, thereby keeping long-term
growth prospects for the Indian organised retail segment intact.
We expect organised retail to post a 31% CAGR over the
next five years.
The value retailing segment is likely to lead 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's growth to pick up on the back of stable
economic conditions. Players such as PRIL, who are straddled
across price and product points, are expected to benefit both in
the short and long term. Overall, the retail segment remains
one of the fastest growing sectors in India and we remain positive
on its growth prospects.
PRIL continues to be our preferred pick
PRIL is better placed than its peers because of its presence across
price points and categories. Apart from cost-rationalisation
measures, the company's restructuring initiatives would also
enable it to enhance its focus on different segments and provide
a good opportunity for value unlocking. At `259, the stock is
trading at 16.7x FY2013E earnings and 1.3x FY2013E P/BV.
Our SOTP target price for PRIL is `332, wherein we have valued
its stake in FCH, Future Bazaar and Future Logistics at `25, `21
and `14, respectively. PRIL continues to be our top pick in the
retail sector and we recommend a Buy rating 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 higher gold prices. However, the falling
rate of decline in volumes indicates that consumers may be
adjusting to high prices and do not expect gold prices to correct
significantly. The company's watch segment is performing well,
while the others segment is also expected to perform well,
as there has been a revival in demand for lifestyle category
goods. At `3,811, the stock is trading at 29.3x FY2013E
earnings and at 14.3x FY2013E P/BV. We remain Neutral on
the stock due to its rich valuations.
We expect Shoppers Stop's performance to improve in the
ensuing quarters on the back of pick-up in consumer demand
for lifestyle retailing. At `350, the stock is trading at 25.6x
FY2013E earnings and at 3.2x FY2013E P/BV, we maintain our
Neutral view on the stock.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Retail
The year gone by was once again very challenging for the
organised retail segment. Organised retail in India has been
growing at a strong pace, backed by enthusiasm of retailers
and investors alike in the sector. Organised retail was responsible
for bringing in the much-needed revolution in the behaviour of
Indian consumers. It helped Indian consumers become more
shopping savvy and demanding in terms of choice and product
range. However, growth in FY2011 has been mired by rising
prices both for retailers as well as consumers.
During the year, the Indian economy steadily recovered to the
pre-2007 level and economists across the board expect GDP
growth of around 8% for the next decade. During 4QFY2011,
retail consumption trends remained upbeat in both the rural
and urban households. However, the retailer faced pressure on
the margin front because of increasing raw-material prices.
Rising inflation led by higher commodity prices has put pressure
on the retailer's margin. We believe retailers across the board
would start re-evaluating their business model, the beginning
of which has already been made by Pantaloon Retail (PRIL),
which announced the restructuring of its consumer durable retail
chain, eZone, in 3QFY2011.
Cautious approach towards expansion
Overall, optimism was also visible in space booking done by
retailers during the quarter. Markets witnessed strong space
booking not only from domestic retailers but from international
retailers as well, albeit with a cautious approach. We believe
the mood on the street is buoyant due to sustained increase in
consumer spends.
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 estimated to
have added 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 of 70%.
Although retailers have gone aggressive in space booking, it
has been done with a very cautious approach post the learning
phase for retailers during the recessionary times of 2008 and
2009. Developers are also a more knowledgeable clan now
and have started appreciating the retailers' matrix (footfalls,
tenant mix and conversion rates) while commencing projects
and approaching retailers. Many developers have changed their
rental model from fixed to variable (revenue share), which is
more acceptable to retailers. We believe the change in strategy
signals evolution in the business model, which allows more
flexibility to retailers in developing their business. This is because
rental is a key cost component in the retail business, which had
witnessed a stunning increase during the pre-recession era. As
a result, during the recession, rental plunged 30-40% across
cities, and it is now stabilising.
Food retailing - The saviour
The food and grocery (F&G) segment forms a major share of
an individual's wallet. It is common knowledge that as a
consumer's earning increases, demand for better food goes up
and the per capita spend on food doubles. F&G is expected to
be at the forefront of the retail revolution. Currently, on an
average, an Indian spends around 60% of his/her earnings on
food, majorly in the unorganised retail segment, thereby offering
an immense opportunity to the organised retailer.
Currently, India is the fourth largest economy on purchasing
power parity terms and is all set to become the third largest by
2013, leaving Japan behind. It is expected that by 2013 there
will be around 300 million middle-class consumers in India
propelling growth of organised food retail in India and
facilitating it to capture a market share of 3.9% of the total
retail sector by CY2013E. Therefore, major players in this
segment, including our top pick PRIL along with Reliance Fresh,
Spencer's and Spinach, stand to benefit from such growth.
Value retailing maintains positive momentum
The value retailing segment is expected to have witnessed robust
growth during 4QFY2011, despite 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. PRIL's value retailing
reported same-store-sales growth of 11.5% in the last quarter,
and we expect the segment to register higher double-digit growth
for the quarter under review. 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
20.9% same-store-sales growth in lifestyle retailing in
3QFY2011, which is expected to come down in 4QFY2011.
Union Budget 2011: Mixed outcome
The Union Budget 2011 did not mention about FDI. However,
it did have few negative announcements such as levy of 1%
central excise and conversion of optional excise to mandatory
excise (at the rate of 10% for all garments from the earlier 4%
for cotton and 10% for others). Consequently, retailers across
the nation went on a one-day strike, which is estimated to have
cost the industry a loss of `500cr in sales.
However, there were proposals pertaining to the agri and
logistics sectors, which would in turn benefit retailers. Proposals
such as increasing agri credit, higher infrastructure outlay and
granting infra status to cold storage will bring indirect benefits
to the sector.
Retail stocks perform in line with the Sensex
Most retail stocks (excluding PRIL) performed in line with the
Sensex during the quarter. Shoppers Stop underperformed the
benchmark BSE Sensex by 1%, while Titan outperformed the
Sensex by 11%. PRIL continued its underperformance and was
down by 24% during the quarter.
4QFY2011 preview
During 4QFY2011, consumer sentiment was upbeat due to
stable economic outlook, thereby providing the much-needed
security in the minds of people. Additionally, seasonal sales
from January-February have resulted in increased footfalls and,
consequently, translated into higher sales per sq. ft. We expect
value retailing to strengthen further, while lifestyle retailing is
likely to extend its growth trajectory, as the upbeat consumer
sentiment should translate into higher demand for lifestyle
goods. We expect retail stocks under our coverage to report
top-line growth of 37% yoy. We estimate PRIL to lead our universe
with 50% yoy top-line growth.
Outlook and valuation
With economic recovery gathering steam, coupled with revived
consumer sentiment during the festive 3QFY2011, footfalls
registered an upward trend, resulting in an increment in same
store sales and per sq. ft. sales. Going ahead, we expect the
trend to continue and strengthen, thereby keeping long-term
growth prospects for the Indian organised retail segment intact.
We expect organised retail to post a 31% CAGR over the
next five years.
The value retailing segment is likely to lead 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's growth to pick up on the back of stable
economic conditions. Players such as PRIL, who are straddled
across price and product points, are expected to benefit both in
the short and long term. Overall, the retail segment remains
one of the fastest growing sectors in India and we remain positive
on its growth prospects.
PRIL continues to be our preferred pick
PRIL is better placed than its peers because of its presence across
price points and categories. Apart from cost-rationalisation
measures, the company's restructuring initiatives would also
enable it to enhance its focus on different segments and provide
a good opportunity for value unlocking. At `259, the stock is
trading at 16.7x FY2013E earnings and 1.3x FY2013E P/BV.
Our SOTP target price for PRIL is `332, wherein we have valued
its stake in FCH, Future Bazaar and Future Logistics at `25, `21
and `14, respectively. PRIL continues to be our top pick in the
retail sector and we recommend a Buy rating 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 higher gold prices. However, the falling
rate of decline in volumes indicates that consumers may be
adjusting to high prices and do not expect gold prices to correct
significantly. The company's watch segment is performing well,
while the others segment is also expected to perform well,
as there has been a revival in demand for lifestyle category
goods. At `3,811, the stock is trading at 29.3x FY2013E
earnings and at 14.3x FY2013E P/BV. We remain Neutral on
the stock due to its rich valuations.
We expect Shoppers Stop's performance to improve in the
ensuing quarters on the back of pick-up in consumer demand
for lifestyle retailing. At `350, the stock is trading at 25.6x
FY2013E earnings and at 3.2x FY2013E P/BV, we maintain our
Neutral view on the stock.
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