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Spencer EBITDA breakeven targeted by FY14
Near term funding comfortable, valuations attractive
Spencer Retail aims at EBITDA breakeven by FY14.
Spencer's losses and CESC's power capex to call for funding in the long
term.
CESC's cash, earnings will help it to tide over near-term funding needs.
Valuations attractive. Buy with a target price of INR475.
Spencer Retail's EBITDA breakeven target by FY14
Spencer Retail's improved financial performance has been driven by a subtle re-jig of
its business model, focus on essentials like "food first retailer", improving GMROI
(gross margin return on inventory investment) and altering the product/sales mix. Our
recent interaction with the Spencer Retail management indicates that the company
plans to improve the operating matrix and is targeting EBITDA breakeven by FY14.
This will be driven by adoption of a 3S model: (a) scale (trading area of 2msf+ v/s
0.95msf currently), (b) superior margins/GMROI (store EBITDA of 7% v/s 4% currently)
and (c) sales improvement (to INR1,250-1,350/square foot v/s INR1,042/square foot
in 1QFY12).
Spencer's cash funding requirement expected at INR1.5b+ pa till FY14
Spencer has cut losses from INR270m/month three years ago to INR95m-97m/month
currently and FY12 losses expected at INR1.1b. Spencer plans to add 0.3-0.4msf a
year over FY12-14, necessitating capex of INR400m-500m a year. Thus, Spencer's
funding needs over FY12-14 are likely to be at INR1.5b+ pa. Increased break even
point for new stores v/s current estimates could possibly lead to higher cash
requirement in the initial period.
Near-term funding needs can be fulfilled through cash, earnings
CESC has cash/cash equivalent of INR10.7b (INR86/share) and regulated PAT of
INR4.5b a year. We calculate equity funding requirements of INR35b for the power
business (considering plans to augment capacity by 2.5GW) and retail business
funding requirement of INR5b over FY12-FY14. CESC invested INR7.2b in the power
vertical and thus, the outstanding requirement is INR28b. In our view, strong cash
flow and cash on books would help CESC to meet its funding requirements for the
power and retail verticals in the near term. CESC has been exploring options to raise
funds in its power and retail vertical, through the PE route, which will help its funding
in the long term.
Valuations attractive, Buy
CESC's distribution business offers strong comfort given strong earnings visibility/
cash flow. Spencer has reported significant improvement in performance in the recent
past. On a standalone basis, CESC quotes at 7x on FY12-13E basis and 13x on
FY11E consolidated PAT (set to improve, as Spencer's losses taper off). We believe
CESC offers a suitable growth option with 1.2GW of capacity under construction and
there exists the possibility of value unlocking in the retail vertical. Maintain Buy with
an SOTP-based target price of INR475.
Spencer EBITDA breakeven targeted by FY14
Breakeven to be achieved through 3S model: (i) Scale of operations, (ii)
Superior margins, (iii) improved Sales.
Operations under tight control, cost efficiency high.
Spencer Retail's improved financial performance has been driven by a subtle re-jig of its
business model, focus on essentials like "food first retailer", improving GMROI (gross
margin return on inventory investment) and altering the product/sales mix. Our recent
interaction with the Spencer Retail management indicates that the company plans to
improve the operating matrix and is targeting EBITDA breakeven by FY14. This will be
driven by adoption of a 3S model: (a) scale (trading area of 2msf+ v/s 0.95msf currently),
(b) superior margins/GMROI (store EBITDA of 7% v/s 4% currently) and (c) sales
improvement (to INR1,250-1,350/square foot v/s INR1,042/square foot in 1QFY12).
Scale: Area expansion critical for better cost absorption
Spencer operates ~208 stores with an area of 1msf and thus the average store size is
5,000 square feet. The structure (mainly small-store formats) does not provide room
for better absorption of fixed cost/infrastructure/labor costs. Going forward, Spencer
plans to add stores of 15,000-20,000 square feet, which will partly correct the existing
operating structure.
Corporate overhead expenses will be better absorbed if they are spread over a larger
area of operations and yield higher revenue. Given the limitation of increasing revenue
and gross margins beyond a point, expansion of area under operations is critical. Spencer
therefore plans to take total area under operations from 0.9msf currently to 2msf by
FY14.
Superior margins, GMROI
Spencer's FY11 gross margin improved ~120bp to 17% and the management aims to
improve it further by 200bp (19%) by FY14. This will be driven by (a) a focus on
being a Foods First Retailer, as F&B items (particularly fresh vegetables and fruits)
offer better gross margins, (b) categories like general merchandise, staples, gourmet/
liquor offer better margins and more so with a judicious private-label strategy and (c)
control on wastage, pilferage and inventory management.
Similarly, Spencer is focusing on gross margin return on inventory investment (GMROI)
for various categories. Higher revenue or gross margins are redundant if inventory
turns are significantly less and the risk of obsolescence is high. Spencer has seen
better GMROI for F&B, chillers and staples while general merchandise is at breakeven
levels. Electrical and electronic products and apparel have an unfavorable GMROI.
Accordingly, Spencer is trying to improve GMROI.
Overall margins will improve through a change in the store mix and relatively low
costs incurred on rentals with revenue/EBITDA sharing models with real estate
developers for new properties. Spencer has signed 0.7msf of property and 95% of
addition to its area under operation will be based on such models.
Sales improvement: Same-store growth encouraging
Spencer has adopted a strategy to enhance revenue through (i) enhancing price and
value propositions, (ii) introducing new products, categories and (iii) relatively high
focus on consumables. Same-store growth has seen a blended increase of 15% and it
has been ~20% for its hypermarkets.
Operations under tight control, cost efficiency high
Spencer's operating cost structure is among the best in the industry in areas like supply
chain (1.6-1.7% v/s 1.5% for best in class), distribution and pilferage/waste management.
Corporate overheads have been cut to INR1.5b a year (down from INR2.2b earlier).
Cash & regulated profits to support near term funding
requirement, long term funding options being explored
We estimate CESC's funding requirement at INR40b over FY12-14, comprising
INR35b for equity funding in the power business and INR5b in the retail
business.
Spencer's losses have been tapering off but we expect continued funding
requirement of INR1.5b+ pa till FY14 given expansion plans.
CESC's distribution business and project pipeline gives it strong cash-flow
visibility and we expect its cash on books (INR10.7b) to help it to meet its
funding requirements in the medium term.
CESC contemplates fund raising for power and retail verticals through the
PE route to meet long term funding requirements.
We estimate CESC's funding requirement for the power and retail businesses to be ~INR40b
over the next four years. This comprises ~INR35b equity funding requirement (including
INR7b that has already been invested) for 2.5GW capacity addition and ~INR5b to fund
Spencer's losses (INR1.7b in FY11). CESC is exploring fund raising options for its power
and retail businesses and a recent regulatory move to increase FDI in multi-brand retail to
51% could be positive for it.
Spencer cut its cash losses from INR270m/month three years ago to INR95m-97m/month
now and the expected cash losses in FY12 are INR1.1b. Spencer plans to add an average
of 0.3-0.4msf a year over FY12-14, necessitating capex of INR400m-500m a year. Thus,
Spencer's funding needs over FY12-14 are likely to be maintained at INR1.5b a year.
Until March 2011, CESC invested INR10b in Spencer as advances and including the
equity issue to promoters towards acquisition of Spencer, the commitment has been over
INR22b.
Distribution business offers comfort, capacity addition looks up
CESC's distribution business in Kolkata gives it steady cash flow and growth. In FY11
CESC's customer base stood at 2.5m. Capex for the distribution business was INR6b,
entailing equity contribution of INR2b in FY11 on FY10 regulated equity of INR21.5b.
Going forward, we expect distribution capex of INR5b-6b pa, thus offering steady growth
In the power business, capacity under construction is 1.2GW. An additional 5.9GW of
projects are in the development stage. CESC's 1.3GW Orissa project is in an advanced
stage of development and awaiting linkages. The project secured 90 points out of 100 for
the Twelfth Plan coal linkages. Besides, CESC's pipeline includes (1) 0.6GW in Jharkhand,
with a captive coal mine, where land acquisition is progressing; (2) 1GW in Bihar, where
land acquisition has begun; (3) 1.3GW expansion in Haldia with TOR approved (4) 300MW
Haldia phase III project, land in possession and (5) the Orissa phase II of a 1,320MW
project, where-in land is acquired but awaits environment clearance and coal linkages.
CESC recently acquired 11.8% equity interest in Resource Generation (an Australian
company with mining interests in South Africa). This will entitle it to procure 139mt of coal
over 38 years with supplies from FY13. Coal from Resource Gen could help to provide
fuel for its 1.3GW Haldia expansion project. Besides power, CESC intends to participate
in infrastructure (roads/ports) projects as a developer and is building a management team.
CESC has cash/cash equivalent of INR10.7b (INR86/share) and regulated PAT of INR4.5b
pa. We calculate equity funding requirements of INR35b for the power business (considering
plans to augment capacity by 2.5GW) and retail business funding requirement of INR5b.
In our view, strong cash flow and cash on books would help CESC to meet its funding
requirements for the power and retail verticals in the near term
Valuations attractive, Buy, target price INR475
Distribution business offers strong earnings visibility, cash flow.
Retail business posts significant improvement.
CESC offers sizable growth option. Buy, with a target price of INR475.
CESC's distribution business offers strong comfort, given its strong earnings visibility/cash
flow. Spencer posted significant improvement in performance in the recent past. On a
standalone basis, CESC quotes at 7x on FY12/13E basis, and 13x FY11 consolidated PAT
(set to improve, as Spencer's losses ease). We believe CESC offers a suitable growth
option with 1.2GW of capacity under construction. There also is the possibility of value
unlocking/funding in the retail vertical.
We expect CESC to post standalone net profit of INR5b in FY12 (up 3%) and INR5.2b in
FY13 (up 4%). We have a Buy recommendation and value CESC based on SOTP
methodology, arriving at a price target of INR475.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Spencer EBITDA breakeven targeted by FY14
Near term funding comfortable, valuations attractive
Spencer Retail aims at EBITDA breakeven by FY14.
Spencer's losses and CESC's power capex to call for funding in the long
term.
CESC's cash, earnings will help it to tide over near-term funding needs.
Valuations attractive. Buy with a target price of INR475.
Spencer Retail's EBITDA breakeven target by FY14
Spencer Retail's improved financial performance has been driven by a subtle re-jig of
its business model, focus on essentials like "food first retailer", improving GMROI
(gross margin return on inventory investment) and altering the product/sales mix. Our
recent interaction with the Spencer Retail management indicates that the company
plans to improve the operating matrix and is targeting EBITDA breakeven by FY14.
This will be driven by adoption of a 3S model: (a) scale (trading area of 2msf+ v/s
0.95msf currently), (b) superior margins/GMROI (store EBITDA of 7% v/s 4% currently)
and (c) sales improvement (to INR1,250-1,350/square foot v/s INR1,042/square foot
in 1QFY12).
Spencer's cash funding requirement expected at INR1.5b+ pa till FY14
Spencer has cut losses from INR270m/month three years ago to INR95m-97m/month
currently and FY12 losses expected at INR1.1b. Spencer plans to add 0.3-0.4msf a
year over FY12-14, necessitating capex of INR400m-500m a year. Thus, Spencer's
funding needs over FY12-14 are likely to be at INR1.5b+ pa. Increased break even
point for new stores v/s current estimates could possibly lead to higher cash
requirement in the initial period.
Near-term funding needs can be fulfilled through cash, earnings
CESC has cash/cash equivalent of INR10.7b (INR86/share) and regulated PAT of
INR4.5b a year. We calculate equity funding requirements of INR35b for the power
business (considering plans to augment capacity by 2.5GW) and retail business
funding requirement of INR5b over FY12-FY14. CESC invested INR7.2b in the power
vertical and thus, the outstanding requirement is INR28b. In our view, strong cash
flow and cash on books would help CESC to meet its funding requirements for the
power and retail verticals in the near term. CESC has been exploring options to raise
funds in its power and retail vertical, through the PE route, which will help its funding
in the long term.
Valuations attractive, Buy
CESC's distribution business offers strong comfort given strong earnings visibility/
cash flow. Spencer has reported significant improvement in performance in the recent
past. On a standalone basis, CESC quotes at 7x on FY12-13E basis and 13x on
FY11E consolidated PAT (set to improve, as Spencer's losses taper off). We believe
CESC offers a suitable growth option with 1.2GW of capacity under construction and
there exists the possibility of value unlocking in the retail vertical. Maintain Buy with
an SOTP-based target price of INR475.
Spencer EBITDA breakeven targeted by FY14
Breakeven to be achieved through 3S model: (i) Scale of operations, (ii)
Superior margins, (iii) improved Sales.
Operations under tight control, cost efficiency high.
Spencer Retail's improved financial performance has been driven by a subtle re-jig of its
business model, focus on essentials like "food first retailer", improving GMROI (gross
margin return on inventory investment) and altering the product/sales mix. Our recent
interaction with the Spencer Retail management indicates that the company plans to
improve the operating matrix and is targeting EBITDA breakeven by FY14. This will be
driven by adoption of a 3S model: (a) scale (trading area of 2msf+ v/s 0.95msf currently),
(b) superior margins/GMROI (store EBITDA of 7% v/s 4% currently) and (c) sales
improvement (to INR1,250-1,350/square foot v/s INR1,042/square foot in 1QFY12).
Scale: Area expansion critical for better cost absorption
Spencer operates ~208 stores with an area of 1msf and thus the average store size is
5,000 square feet. The structure (mainly small-store formats) does not provide room
for better absorption of fixed cost/infrastructure/labor costs. Going forward, Spencer
plans to add stores of 15,000-20,000 square feet, which will partly correct the existing
operating structure.
Corporate overhead expenses will be better absorbed if they are spread over a larger
area of operations and yield higher revenue. Given the limitation of increasing revenue
and gross margins beyond a point, expansion of area under operations is critical. Spencer
therefore plans to take total area under operations from 0.9msf currently to 2msf by
FY14.
Superior margins, GMROI
Spencer's FY11 gross margin improved ~120bp to 17% and the management aims to
improve it further by 200bp (19%) by FY14. This will be driven by (a) a focus on
being a Foods First Retailer, as F&B items (particularly fresh vegetables and fruits)
offer better gross margins, (b) categories like general merchandise, staples, gourmet/
liquor offer better margins and more so with a judicious private-label strategy and (c)
control on wastage, pilferage and inventory management.
Similarly, Spencer is focusing on gross margin return on inventory investment (GMROI)
for various categories. Higher revenue or gross margins are redundant if inventory
turns are significantly less and the risk of obsolescence is high. Spencer has seen
better GMROI for F&B, chillers and staples while general merchandise is at breakeven
levels. Electrical and electronic products and apparel have an unfavorable GMROI.
Accordingly, Spencer is trying to improve GMROI.
Overall margins will improve through a change in the store mix and relatively low
costs incurred on rentals with revenue/EBITDA sharing models with real estate
developers for new properties. Spencer has signed 0.7msf of property and 95% of
addition to its area under operation will be based on such models.
Sales improvement: Same-store growth encouraging
Spencer has adopted a strategy to enhance revenue through (i) enhancing price and
value propositions, (ii) introducing new products, categories and (iii) relatively high
focus on consumables. Same-store growth has seen a blended increase of 15% and it
has been ~20% for its hypermarkets.
Operations under tight control, cost efficiency high
Spencer's operating cost structure is among the best in the industry in areas like supply
chain (1.6-1.7% v/s 1.5% for best in class), distribution and pilferage/waste management.
Corporate overheads have been cut to INR1.5b a year (down from INR2.2b earlier).
Cash & regulated profits to support near term funding
requirement, long term funding options being explored
We estimate CESC's funding requirement at INR40b over FY12-14, comprising
INR35b for equity funding in the power business and INR5b in the retail
business.
Spencer's losses have been tapering off but we expect continued funding
requirement of INR1.5b+ pa till FY14 given expansion plans.
CESC's distribution business and project pipeline gives it strong cash-flow
visibility and we expect its cash on books (INR10.7b) to help it to meet its
funding requirements in the medium term.
CESC contemplates fund raising for power and retail verticals through the
PE route to meet long term funding requirements.
We estimate CESC's funding requirement for the power and retail businesses to be ~INR40b
over the next four years. This comprises ~INR35b equity funding requirement (including
INR7b that has already been invested) for 2.5GW capacity addition and ~INR5b to fund
Spencer's losses (INR1.7b in FY11). CESC is exploring fund raising options for its power
and retail businesses and a recent regulatory move to increase FDI in multi-brand retail to
51% could be positive for it.
Spencer cut its cash losses from INR270m/month three years ago to INR95m-97m/month
now and the expected cash losses in FY12 are INR1.1b. Spencer plans to add an average
of 0.3-0.4msf a year over FY12-14, necessitating capex of INR400m-500m a year. Thus,
Spencer's funding needs over FY12-14 are likely to be maintained at INR1.5b a year.
Until March 2011, CESC invested INR10b in Spencer as advances and including the
equity issue to promoters towards acquisition of Spencer, the commitment has been over
INR22b.
Distribution business offers comfort, capacity addition looks up
CESC's distribution business in Kolkata gives it steady cash flow and growth. In FY11
CESC's customer base stood at 2.5m. Capex for the distribution business was INR6b,
entailing equity contribution of INR2b in FY11 on FY10 regulated equity of INR21.5b.
Going forward, we expect distribution capex of INR5b-6b pa, thus offering steady growth
In the power business, capacity under construction is 1.2GW. An additional 5.9GW of
projects are in the development stage. CESC's 1.3GW Orissa project is in an advanced
stage of development and awaiting linkages. The project secured 90 points out of 100 for
the Twelfth Plan coal linkages. Besides, CESC's pipeline includes (1) 0.6GW in Jharkhand,
with a captive coal mine, where land acquisition is progressing; (2) 1GW in Bihar, where
land acquisition has begun; (3) 1.3GW expansion in Haldia with TOR approved (4) 300MW
Haldia phase III project, land in possession and (5) the Orissa phase II of a 1,320MW
project, where-in land is acquired but awaits environment clearance and coal linkages.
CESC recently acquired 11.8% equity interest in Resource Generation (an Australian
company with mining interests in South Africa). This will entitle it to procure 139mt of coal
over 38 years with supplies from FY13. Coal from Resource Gen could help to provide
fuel for its 1.3GW Haldia expansion project. Besides power, CESC intends to participate
in infrastructure (roads/ports) projects as a developer and is building a management team.
CESC has cash/cash equivalent of INR10.7b (INR86/share) and regulated PAT of INR4.5b
pa. We calculate equity funding requirements of INR35b for the power business (considering
plans to augment capacity by 2.5GW) and retail business funding requirement of INR5b.
In our view, strong cash flow and cash on books would help CESC to meet its funding
requirements for the power and retail verticals in the near term
Valuations attractive, Buy, target price INR475
Distribution business offers strong earnings visibility, cash flow.
Retail business posts significant improvement.
CESC offers sizable growth option. Buy, with a target price of INR475.
CESC's distribution business offers strong comfort, given its strong earnings visibility/cash
flow. Spencer posted significant improvement in performance in the recent past. On a
standalone basis, CESC quotes at 7x on FY12/13E basis, and 13x FY11 consolidated PAT
(set to improve, as Spencer's losses ease). We believe CESC offers a suitable growth
option with 1.2GW of capacity under construction. There also is the possibility of value
unlocking/funding in the retail vertical.
We expect CESC to post standalone net profit of INR5b in FY12 (up 3%) and INR5.2b in
FY13 (up 4%). We have a Buy recommendation and value CESC based on SOTP
methodology, arriving at a price target of INR475.
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