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Retailers high on rising footfalls

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Improvement in operational performance, and augur well for the organised retail sector

A rise in consumer confidence, improvement in profitability and aggressive signal better tidings for listed players in the organised retail space. Further, the recent news flow on the possibility of the government allowing foreign direct investment (FDI) in multi-brand retailing and fresh equity infusion in troubled retailer, Vishal Retail, are clear positives and could lead to a jump in investments in the sector. Moreover, analysts believe listed could attract foreign investments by spinning off their subsidiaries into separate companies.

Changing fortunes
From the situation a year ago when the sector was sitting on losses of Rs 1,400 crore and had to shut down 2,000 stores, the organised retail industry has witnessed an upturn. This is largely on the back of a revival in the economy since the latter half of 2008-09, according to Crisil Research. Its head says: “The five largest listed retailers exhibited a revenue growth of 20 per cent in 2009-10 on a year-on-year basis.”

A Nielsen survey in the March quarter had also indicated that consumer confidence had rebounded to pre-crisis levels (third quarter of 2007). CMD further adds: “Customer footfalls are increasing and the industry is expected to close the June quarter on a good note.”
 

EXPANSION BACK ON TRACK
In million sq ft FY09 FY10E FY11E FY12E
Pantaloon Retail 10.00 11.00 13.00 16.00
Shoppers Stop 1.80 2.04 2.89 3.13
Trent 1.38 1.87 2.53 2.91
Koutons Retail 1.26 1.36 1.40 1.48
E: Estimates                                  Source: M F Global, Companies, Analyst reports
 
IN DEMAND
FY12 Estimates Koutons
Retail
Pantaloon
Retail
Shoppers
Stop
Trent
Sales  (Rs cr) 1,540 12,827 2,073 1,883
Ebitda (%) 20.0 10.2 8.5 2.7
EPS (Rs) 38.4 21.1 16.0 13.6
P/E (x) 8.2 21.5 37.7 68.4
EV/Sales (x) 1.0 0.8 0.8 0.9
EV= Enterprise value                                       Source: M F Global, ICICI Securities

Cost rationalisation
Retailers also undertook several other cost-cutting measures, like reducing staff costs, resizing large-format stores and closing loss-making stores, resulting in a higher profitability. Koutons Retail President points out: “The credit profiles of major organised retailers have improved in the last one year due to a focus on cost reduction and inventory management. Prudent funding to finance expansions through a mix of equity and debt has resulted in a steady growth for the companies.”

Aggressive expansion
IIFL believes India’s largest listed retailer, Pantaloon Retail, is likely to increase its retail space over the next two-three years from an annual rate of two million sq ft currently to three-four million sq ft. This is a clear acceleration over 2008-09 and 2009-10 (year ended June, as in Pantaloon's case), which saw an annual 1.5-1.7 million sq ft retail space expansion. With the increase in same-store sales such leading players as Shoppers Stop, analysts estimate that expansion plans are likely to be put back on the agenda for most companies.

We review the performance of the largest listed retailers:

Koutons Retail: After a sub-par March quarter performance, the company plans to improve profitability by better inventory management, debt restructuring and reducing discounts, according to ICICI Securities. Given its strong franchisee-based business model and steps taken to improve efficiency and profitability, the company’s performance is expected to improve. However, the company is likely to be circumspect in its expansion due to the recent performance. The stock is trading at attractive valuations and is likely to return over 20 per cent returns over the next one year.

Pantaloon Retail: Analysts believe the company is likely to undergo significant restructuring in the current fiscal by divesting Future Capital Holdings in which it has 55 per cent stake as well as the insurance business that would make Pantaloon a pure retail play. The company has put its value format business (Big Bazaar and Food Bazaar) in a 100 per cent subsidiary, which will help bring in a strategic investor. Analysts have revised upwards their earnings estimate for Pantaloon, given its plans and performance. At current price, the stock can deliver 17-20 per cent returns over the next one year.

Shoppers Stop: A sharp rebound in the March quarter performance marked a business turnaround for the company. Given its expansion plans for both format as well as for its recently acquired 51 per cent subsidiary Hypercity, the company would require about Rs 200 crore for expansion. With its debt-equity ratio at 0.6 and an internal cash flow of Rs 100 crore per year, this should not be an issue. Having run up significantly over the last two months, the stock at current levels is quoting at an expensive 37 times its 2011-12 earnings.

Trent: The company has resumed expansion of its formats and intends to increase the store area by 80 per cent by the end of 2010-11, believes research firm M F Global. The company’s tie-up with Tesco will help Trent to manage back-end operations without compromising on the product mix and plug working capital leaks. Additionally, Trent’s proposed rights issue will give visibility to its expansion plans. New stores are likely to achieve breakeven in 15 months and are likely to contribute to profitability in 2011-12, believes the research firm. The stock is quoting at 68 times its 2011-12 earnings and is expensively priced even on other valuation parameters. Avoid for now.

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