HyperCity to buoy profit growth! • Shoppers Stop:: ICICI Securities, report link

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HyperCity to buoy profit growth!
• Shoppers Stop’s (SSL) Q2FY15 sales grew 12.7% YoY to | 1241.4
crore (I-direct estimate: | 1303.2 crore) led by 0.2 million sq ft (msf)
space addition YoY to 5.7msf
• Like to like (LTL) sales growth returned to double digits (11%) after a
sluggish 3.7% LTL growth in Q1FY15, however it was lower than our
expectation of 16%.
• The operating margin at 4.3% was lower than our expectation of
4.7% as the departmental store format margin did not pick up in line
with our expectation. However, HyperCity performed well and
achieved EBITDA breakeven at the company level as operating
margin improved from -5.8% in Q2FY14 to 0.1% in Q2FY15
Departmental store addition to be slower in FY16E, FY17E
Over the last three years, the company has added ~2.0 mn sq ft. In terms
of number of stores, the count has increased from 123 stores in FY11 to
231 stores in Q2FY15. During FY15E, SSL is likely to add eight
departmental stores (of which five have been added in H1FY15) while one
HyperCity store is expected to be added in Q4FY15. Thereafter, the
departmental store addition is likely to come down to three or four stores
per year. We expect the total space to increase from 5.4 mn sq ft in FY14
to 6.8 mn sq ft by FY17E.
HyperCity margin improvement to continue
HyperCity achieved EBITDA breakeven in Q2FY15 with an EBITDA margin
of 0.1%. Its efforts like rightsizing of stores and optimising the product
mix with higher share of fashion are bearing fruit. With the turnaround of
HyperCity, we expect SSL to witness a significant improvement in
profitability from FY16E onwards.
Maintaining comfortable leverage with continuous growth
Despite the aggressive expansion, SSL has curtailed the debt/equity of
1.3x. This is commendable considering that the breakeven for newly
added stores takes 18-24 months. Considering the current slowdown in
demand, we expect the debt/equity to touch a high of 1.3x in FY15E, and
come down to 0.9x in FY17E. As compared to other retailers, SSL is
comfortably leveraged and will be in a better position to withstand a
tough economic environment or take advantage of improvement in
business scenario.
Strong growth in organised retail segment to aid growth
As per a BCG-CII report, the Indian retail industry is slated to grow at a
CAGR of 9.1% during FY14-20E. During this period, the organised retail
segment is likely to grow at a robust 24.9%, thereby increasing the scope
for well established domestic retailers. The share of organised retail is
likely to go up from 10.6% in FY14 to 21.0% by FY20E. Considering that
SSL has considerably expanded over the last few years, we believe it will
be well poised to capitalise on this growth opportunity.
Improvement in HyperCity to trigger upgrade; recommend BUY
The performance of HyperCity has shown continuous improvement and
the company seems on track to achieve the EBITDA breakeven this fiscal
and PAT breakeven in FY16E. We believe that departmental format would
also perform well with improvement in consumer sentiment. We
introduce FY17E estimates and upgrade the stock to BUY with a target
price of | 585 (SOTP based - 0.9x (departmental format) and 0.8x
(HyperCity format) FY17E EV/sales).

LINK
http://content.icicidirect.com/mailimages/IDirect_ShoppersStop_Q2FY15.pdf