Profiting from rising consumption

The Shoppers Stop scrip rose 4.5 per cent over the last two days on news that the company increased its stake in Hypercity to 51 per cent and that the company intends to raise resources to fund expansion plans. With the improvement in economic environment and consumption demand increasing, the company — which deals in both mass market as well as premium brands — is likely to reap the gains.

The markets have given a thumbs up to the improvement in its financials for the March quarter as well as its expansion plans for the current fiscal, helping the scrip gain 39 per cent over the last one month.

Spending is back
While the company recorded a 20 per cent sales growth year-on-year for the March quarter, same-store sales (SSS) grew 16 per cent — part of the reason being a low base. However, given that the first nine months of the current fiscal had flattish year-on-year growth, the jump in numbers in the fourth quarter — the company believes — is a clear indication that consumption is picking up and is likely to sustain.

The increase in sales growth was accompanied by an increase in footfalls, higher conversion ratio, transaction size and average selling price when compared to the year-ago quarter. Over the last couple of quarters, the company has been focusing on reducing its share of private label merchandise, which, while offering higher margins, strain working capital situation. While apparel continues to be its biggest segment, with western wear gaining favour with women, beauty products — where the company is the largest organised player — is likely to see increasing demand.

Expansion: Upping the ante
The company, which has 30 departmental stores (1.89 million square feet), plans to add 18 stores over the next one and a half years, of which 8-12 stores will come up in the current fiscal and involve an addition of a million square feet. The company believes the business expansion for the departmental store format will moderate when it reaches the 50-store target. The company needs about Rs 180 crore over the next one and a half years to fund its expansion plans and most of the funding requirements are expected to come from the Rs 100 crore of cash flow being generated from the business.

The company also intends to increase its seven-unit Hypercity business to 25 units over the next three years. Given that its debt-to-equity ratio is 0.6, the company may raise more funds to expand, going ahead.

At current levels, the stock is quoting at an expensive 24 times its 2011-12 estimated earnings of Rs 23. Though the environment has improved significantly and the company should be able to maintain its double-digit sales growth and higher margins, the gains are already priced in.

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