Initiating Coverage | Retail | Shoppers Stop Ltd AAddiittyyaa BBiirrllaa MMoonneeyy Shoppers Stop Ltd … India shops here 21st October 2011 Analyst Details Sunny Agrawal 022-42333458 [email protected] Initiating Coverage | Retail | Shoppers Stop Ltd (SSL) AAddiittyyaaBBiirrllaa MMoonneeyy Shoppers Stop Ltd (SSL) is one of the pioneers in organised retail in India and has chain of multi brand departmental stores spread Rating CMP Target Upside % predominantly in Tier 1 and Tier 2 cities. The company has presence in value retailing through it chain of stores under the name of NEUTRAL 353.9 344 (2.9) Hypercity. As of FY11, the company has posted consolidated sales of `23232.6 mn and PAT of `431.9 mn. Risk Return Matrix Investment Arguments h g  Retail industry - favourable demographics and rising consumption; unorganised to organised still remains a big Hi underlying theme: Rising disposable income, younger age profile and increasing urbanisation, the share of organised retailing is m u di likely to grow from 4-5% in 2007 to 14-18% in 2015. In value terms, the organisedretail industry is likely to grow from current $26 bn Me n in 2010 to $65-80 bnby 2015 (Source: SSL AR, McKinsey).Overall, by 2015, retail industry market size will be $450bn. ur w Ret Lo  Early mover advantage: With two decades of operational history, SS is well spread across the country. The early entry benefits the Low Medium High Risk company in form of best locations of stores (in terms of areas with large propensity to consume) and cheaper lease rentals in growing Indian cities. In addition, the company also benefits from strong brand visibility and reputation, which usually take longer time, so as to Company Data build the consumer confidence. BSE Code 532638  Multiple levers to enhance profitability: The company can further increase its profitability with presenceof levers like: (a) savings NSE Code SHOPERSTOP in procurement and better terms leading to reduction in working capital cycle, (b) better absorption of fixed operating overheads as Equity Capital (`mn) 410.8 more and more stores reaches maturity, and (c ) introduction of GST will lead to saving of service tax on lease rentals and other Face Value (`) 5 expenses (total expected savings of 0.9-1.0% of sales). Market Cap (`mn) 29079 Avg Daily Volume (Qtly) 39526  SS to generate healthy FCF from FY13E onwards and PAT to grow atCAGR of 20.6% during FY11-FY13E period: We expect 52 week H/L (`) 504/261 SSL to open 12 and 10 SS stores in FY12E and FY13E respectively. Overall, we expect net sales, EBITDA and PAT to grow at CAGR of 22.1%, 22.4% and 20.6% during FY11-FY13E period respectively. We expect, SS to generate FCF of `3960.0 mn during Shareholding (%) FY13-FY15E period and expect the company to be debt free in FY15E on a standalone basis. Holders Sep 11 Jun 11 Mar 11  Hypercitylikely to breakeven at operating level in FY13E: Hypercityis relatively new baby of SS with only 3 stores out of total 9 Promoters 67.9 68.2 68.2 stores (as of FY11) older than 2 years. Customers have appreciated the format and with operations getting stabilised at new stores FIIs 12.9 13.2 13.2 we expect it to breakeven at EBITDA level in FY13. MFs/Banks & FI’s 6.5 6.6 6.3  Valuations: We have valued the company based on SOTP valuation. Based on DCF valuation methodology, our 1-yr fwd fair value Public & Others 12.6 12.1 12.3 for standalone SS comes to `296/share. The other businesses of SSL –Hypercity, Crossword, Timezone, etc. has been valued at ` Chart: SSL vs. Sensex 48.2/share. Our fair value for SSL comes to `344/share. We initiate coverage with a NEUTRAL rating on the stock. e150 c Financial Snapshot (`mn) man130 or EBITDA EV/EBITDA erf110 In `mn Sales YoY(%) EBITDA YoY(%) PAT YoY(%) EPS(`) RoE(%) RoCE(%) P/E(x) P/B(x) P (%) (x) ve 90 FY10 15,024 12.2 1,135 161.4 488 (224.8) 7.2 7.6 18.0 18.2 50.6 23.5 8.0 elati 70 R FFYY1121E 1281,,421075 2125..61 11,,562514 348..07 775215 (534.5.0) 98..18 87..38 1161..65 2105..46 3480..71 2108..19 44..94 Oct-10 Nov-10 Jan-11 Feb-11 Apr-11 May-11 Jul-11 Aug-11 Oct-11 FY13E 27,448 29.4 2,278 37.7 1,094 50.8 13.3 8.3 15.3 19.6 26.6 13.5 3.8 Shoppers Stop Ltd Return Sensex Return Source: ABML Research, company data Source: NSE, BSE, Capitaline, ABML Research 2 Company Background – Shoppers Stop Ltd (SSL) AAddiittyyaaBBiirrllaa MMoonneeyy SHOPPERS STOP LTD (SSL) Belongs to K.Raheja group Parent company FY11 consolidated net sales: ` 23232.6 mn FY11 consolidated PAT: ` 431.9 mn Operates Subsidiaries JV’s* SS Department Store Hypercity Ltd Nuance Group (51% stake) (SSL holds 50% stake) • Store name: Shoppers Stop • Store name: Hypercity • No of stores as of FY11: 1 • No of stores as of FY11: 38 • No of stores as of FY11: 09 • Chargeable area as of FY11 : • Presence in 18 cities 0.02 mn sq ft • Presence in 7 cities • Chargeable area as of FY11 : • Product Offering: Airport Retailing 2.14 mn sq ft • Chargeable area as of FY11 : 0.98 mn sq ft • FY11 Net Sales: ` 17120 mn Time zone (SSL holds 45% stake) • FY11 Net Sales: ` 5661 mn • FY11 PAT: ` 751 mn • Store name: Timezone • FY11 PAT: Loss of ` 880 mn • Loyalty program: First Citizen (2.1 • No of stores as of FY11: 14 mn members) • Loyalty program: Discovery Club • Chargeable area as of FY11 : (0.16 mn members) 0.097 mn sq ft Speciality Stores* Crossword (100% stake) • Product Offering: Gaming zone • HomeStop - No of stores: 5 • Store name: Crosswords • MAC, Clinique Estee Lauder - No of stores: 35 • No of stores as of FY11: 69 • Mothercare - No of stores: 7 • Product Offering: Books, CDs, magazine, stationery, toys and music Source: Company, ABML Research * JV and Specialitystore data: As of 30th June 2011 3 Business Model – Store Format AAddiittyyaaBBiirrllaa MMoonneeyy Particulars Shoppers Stop Hypercity Foods and Groceries - 61% Apparels - 58.8% Product Category General Merchandise - 31% Non Apparels - 41.2% Apparels & Jewellery – 08% Trading Model Consignment 45% Bought Out 45% Mostly bought out Concession 10% Format Departmental store Hypermarket Avg store size 50000 - 55000 sq ft 75000 - 100000 sq ft Competitors Store Central, Pantaloons, Westside, Globus More, Big Bazaar, Star Bazaar Long term EBITDA margin 8-9% 6-7% Long term PAT margin 4-6% ~2.0% EBITDA breakeven period for new store ~24 months ~36 months Source: Company, ABML Research • SS is the departmental store with average store size in the range of 50000-55000 sq ft, with majority of the sales coming from apparels as the product category. The company opened its first SS store in 1991. The company has gradually moved from “Premium” category in 2005 to “Bridge to Luxury” category in 2009. • Hypercity is the relatively new venture with only 3 stores (out of total 9 stores) older than 3 yrs (as of FY11). Hypercity is the hypermarket with average store size in the range of 75000-100000 sq ft with majority of the sales coming from Food and Groceries. Going forward, as the stores get matured, the contribution from Food and Groceries is likely to decline. SS holds 51% stake in Hypercity. 4 Business Model – Scalability and Key Assumptions AAddiittyyaaBBiirrllaa MMoonneeyy Shoppers Stop Hypercity Particulars FY11 FY15E FY20E FY11 FY15E FY20E Number of stores 38 70 90 9 20 42 Avg store size (sq ft) 56391 55755 55587 109361 87462 75696 Total cumulative sq ft (mn) 2.1 3.9 5.0 1.0 1.7 3.2 Revenue (` mn) 18417 42737 72281 5661 14697 40429 Avg revenue/sq ft (`/sq ft) 8518 11370 14724 6377 8402 12717 Gross margin (%) 33.8 35.3 35.8 20.5 22.0 23.5 Rent as a % of sales 8.3 8.7 8.6 6.2 5.0 5.0 Employee cost as a % of sales 5.4 5.9 5.8 7.9 6.8 5.9 EBITDA margin (%) 8.3 8.6 9.3 -5.9 2.2 5.9 Source: Company, ABML Research • We expect, total store count from SS to reach to 70 stores in FY15E and 90 stores in FY20E. We expect total cumulative sq ft to be at 3.9 mn sq ft and 5.0 mn sq ft in FY15E and FY20E. • For Hypercity, we expect, total store count to reach to 20 stores in FY15E and 42 stores in FY20E. We expect total cumulative sq ft to be at 1.7 mn sq ft and 3.2 mn sq ft in FY15E and FY20E. 5 Peer Comparison – Operating metrics AAddiittyyaaBBiirrllaa MMoonneeyy Shoppers Stop PRIL - Lifestyle Business* Trent** Particulars FY10 FY11 FY10 FY11 FY10 FY11 Sales (` mn) 15023.6 18416.5 59343.7 40974.3 5874.8 7167.1 Gross margin (%) 34.5 33.8 31.5 35.3 51.0 48.4 EBITDA margin (%) 7.6 8.3 10.0 10.6 5.8 4.6 Total sq ft (mn sq ft) 1.8 2.1 3.4 4.3 NA NA 25 – Central 32 – Central No of stores 30 38 43 54 48 – Pantaloons 59 – Pantaloons SSS (%) 4 17 14 15.6 ~1.5-2 ~11-12 Avg store size 50000-55000 sq ft 25000 sq ft for Pantaloons 20,000 sq ft for Westside 100000 sq ft for Central * From 1st Jan 2010, the Value retail business of Pantaloons wastransferred to its subsidiary FVRL. Hence, FY11 and FY10 numbers are not comparable ** Standalone numbers, thereby reflecting Westside operations. Westside is the departmental store, which focus more on private labels. Exact number for SSS no available, taken from chart from FY11 annual report Source: Company, PRIL and Trent Annual Report, ABML Research 6 Business Model – SS Single Store Profitability Sheet AAddiittyyaaBBiirrllaa MMoonneeyy Store size (sq ft) 55000 Capex/ sq ft 1500 Total capex(`mn) 82.5 Assumed Equity % 50% Assumed Debt % 50% Equity (`mn) 41.3 LT Debt (`mn) 41.3 Year 1 Year 2 Particulars 1Q 2Q 3Q 4Q FY 1Q 2Q 3Q 4Q FY Year 3 Year 4 Year 5 Year 10 Year 15 Year 20 Net Sales (`mn) 55.0 61.6 69.0 77.3 262.9 86.5 96.9 108.6 121.6 413.6 537.7 618.4 692.6 1166.5 1605.6 2148.6 Sales/sq ft (`/sq ft) 1000.0 1120.0 1254.4 1404.9 4779.3 1573.5 1762.3 1973.8 2210.7 7520.4 9776.5 11242.9 12592.1 21209.8 29191.9 39065.3 Gross Profit (`mn) 91.2 143.6 186.5 214.3 240.1 405.2 555.6 745.6 Gross profit/sq ft (`/sq ft) 1658 2610 3391 3896 4365 7367 10102 13556 GPM (%) 34.7% 34.7% 34.7% 34.7% 34.7% 34.7% 34.6% 34.7% EBITDA (`mn) -43.0 -3.4 27.0 41.0 52.7 122.4 147.2 167.7 EBITDA/sq ft (`/sq ft) -783 -62 491 746 959 2226 2676 3050 EBITDA % -16.4 -0.8 5.0 6.6 7.6 10.5 9.2 7.8 Other Income (`mn) 0.0 0.0 0.2 0.4 0.4 11.4 36.1 63.5 Depreciation (`mn) 6.6 6.6 6.6 6.6 6.6 11.2 4.6 11.5 EBIT (`mn) -49.6 -10.0 20.6 34.8 46.5 122.6 178.6 219.7 Interest (`mn) 11.9 14.8 15.0 12.6 8.3 0.7 0.0 0.0 PBT (`mn) -61.6 -24.8 5.6 22.2 38.2 121.9 178.6 219.7 PAT (`mn) -61.6 -24.8 5.6 22.2 38.2 81.4 119.3 146.8 Source: ABML Research IRR 23.8% • As seen above, based on the information we gathered with various experts of retail industry, we have made an profitability sheet for single SS store. As per our calculation, the store should generate IRR of ~24%. • Please note that, all the calculations are based on certain assumptions, hence this model cant be taken as a standard benchmark for all SS stores. The business dynamics may vary depending on store location, size and ongoing macro environment. 7 Business Model – Hypercity Single Store Profitability Sheet AAddiittyyaaBBiirrllaa MMoonneeyy Store size (sq ft) 75000 Capex/ sq ft 1400 Total capex (`mn) 105 Assumed Equity % 50% Assumed Debt % 50% Equity (`mn) 52.5 LT Debt (`mn) 52.5 Year 1 Year 2 Year 3 Particulars 1Q 2Q 3Q 4Q FY 1Q 2Q 3Q 4Q FY 1Q 2Q 3Q 4Q FY Year 4 Year 5 Year 10 Year 15 Year 20 Net Sales (`mn) 66 72 78 85 300 93 101 110 120 424 130 141 153 166 591 680 775 1305 1796 2403 Sales/sq ft (`/sq ft) 875 954 1040 1133 4001 1235 1346 1467 1600 5648 1735 1883 2043 2217 7878 9060 10328 17397 23944 32043 Gross Profit (`mn) 61 86 119 137 156 267 379 508 Gross profit/sq ft (`/sq ft) 808 1141 1591 1830 2086 3554 5057 6767 GPM (%) 20.2% 20.2% 20.2% 20.2% 20.2% 20.4% 21.1% 21.1% EBITDA (`mn) -21 -2 22 31 41 88 121 150 EBITDA/sq ft (`/sq ft) -281 -28 292 409 544 1176 1609 1996 EBITDA % -7.0 -0.5 3.7 4.5 5.3 6.8 6.7 6.2 Other Income (`mn) 0.0 0.0 0.0 0.7 0.9 8.3 29.8 54.6 Depreciation (`mn) 8.4 8.4 8.4 8.4 8.4 14.3 5.9 14.6 EBIT (`mn) -29.5 -10.5 13.5 23.0 33.3 82.2 144.6 189.7 Interest (`mn) 15.3 16.7 16.2 14.6 10.9 0.0 0.0 0.0 PBT (`mn) -45 -27 -3 8 22 82 145 190 PAT (`mn) -45 -27 -3 8 22 55 97 127 Source: ABML Research IRR 18.0% • Similarly, we have made an profitability sheet for single Hypercity store. As per our calculation, the store should generate IRR of ~18%. Please note that, all the calculations are based on certain assumptions, hence this model cant be taken as a standard benchmark for all Hypercity stores. The business dynamics may vary depending on store location, size and ongoing macro environment. 8 SWOT Analysis AAddiittyyaaBBiirrllaa MMoonneeyy Strength Weakness/ Risk & Concerns Strength Weakness/ Risk & Concerns • Loyalty Program: Has 2 mn members (largest in country) • Execution: Next level of growth will mainly come from Tier-2 • Loyalty Program: Has 2 mn members (largest in country) • Execution: Next level of growth will mainly come from Tier-2 under “First Citizen” program which accounts for 73% of the and Tier- 3 cities, which usually takes more time to break- under “First Citizen” program which accounts for 73% of the and Tier- 3 cities, which usually takes more time to break- SS sales. even and has different operating dynamics. SS sales. even and has different operating dynamics. • Has first mover advantage in terms of location of stores, well- • Employee: Lack of good trained manpower leads to high • Has first mover advantage in terms of location of stores, well- • Employee: Lack of good trained manpower leads to high established backend network and well-established brand wage inflation and chances of poaching from competitors established backend network and well-established brand wage inflation and chances of poaching from competitors name. name. • Govt policies: Recent excise duty on branded readymade • Govt policies: Recent excise duty on branded readymade • Two decades of experience in understanding Indian garments and delay in key policies like GST • Two decades of experience in understanding Indian garments and delay in key policies like GST consumer market with experienced management team. consumer market with experienced management team. • Delay in store opening: The store opening depends on timely • Delay in store opening: The store opening depends on timely • Strong bargaining power: Being well established brand name, deliver of property by the real estate player, which is not in • Strong bargaining power: Being well established brand name, deliver of property by the real estate player, which is not in network and scale, the company has strong bargaining control of SSL. network and scale, the company has strong bargaining control of SSL. power for property rentals and can clinch better commercial power for property rentals and can clinch better commercial • High rental: Increase in competition may lead to high rental terms with merchandise suppliers etc. • High rental: Increase in competition may lead to high rental terms with merchandise suppliers etc. going forward. going forward. SSWWOOTT AAnnaallyyssiiss Opportunity Threat Opportunity Threat • Humungous opportunity to tap modern retail market which • Increasing competitive intensity due rapid expansion from • Humungous opportunity to tap modern retail market which • Increasing competitive intensity due rapid expansion from has current penetration of just 6-7% ($28 bn) and is expected Central (Future group), Reliance Trends (Reliance has current penetration of just 6-7% ($28 bn) and is expected Central (Future group), Reliance Trends (Reliance to reach 14-18% ($ 65-85bn) by 2020. (Source: SSL Annual Industries), Westside (Tata group) etc. to reach 14-18% ($ 65-85bn) by 2020. (Source: SSL Annual Industries), Westside (Tata group) etc. Report, Mckinsey) Report, Mckinsey) • Presence and expansion of single brand stores by the brand • Presence and expansion of single brand stores by the brand • As per Mckinsey, by 2025 India will have 41% of its owners either on their own or through franchisee • As per Mckinsey, by 2025 India will have 41% of its owners either on their own or through franchisee population in mid income segment as compared to 5% in population in mid income segment as compared to 5% in • Competition may intensify post opening of FDI in retail. 2005. This will lead to more aspirational buying and will be • Competition may intensify post opening of FDI in retail. 2005. This will lead to more aspirational buying and will be beneficial for players like SSL. • Economic slowdown: A prolong slowdown in economy affects beneficial for players like SSL. • Economic slowdown: A prolong slowdown in economy affects the discretionary consumption first. • Hypermarket: There is immense scope for hypermarket in the discretionary consumption first. • Hypermarket: There is immense scope for hypermarket in India and going forward Hypercity can be one of the main • Delay and availability of new properties could bring down the India and going forward Hypercity can be one of the main • Delay and availability of new properties could bring down the growth engine for the company. overall IRR as new locations and volume growth is critical for growth engine for the company. overall IRR as new locations and volume growth is critical for a retailer • The company is well positioned to capture more wallet share a retailer • The company is well positioned to capture more wallet share by diversifying into multiple formats and presence in by diversifying into multiple formats and presence in furnishing, books, cosmetic products, kids merchandise, etc. furnishing, books, cosmetic products, kids merchandise, etc. 9 Key business metrics and its implications – Shoppers Stop AAddiittyyaaBBiirrllaa MMoonneeyy Topline Drivers - a) Volume growth and b) Value growth Year end number of stores -SS Sales per sq ft -SS Rapid store expansion in next 2 yrs Volume growth coupled with inflation will lead 56 60 will fuel volume growth to gradual increase in per sq ft revenue 9341 48 10000 8518 8671 9 50 8 7429 7592 7955 38 8000 10 7.7 6 40 7.1 unit 30 244 26 2 340 8 48 Rs/sq ft 46000000 4.8 3 20 38 2.2 1.8 0 24 26 30 2000 (1.7) 10 20 0 -3 0 FY08 FY09 FY10 FY11 FY12E FY13E FY08 FY09 FY10 FY11 FY12E FY13E Existing Stores New stores Sales per sq ft YoY% Source: Bloomberg , ABML Research Source: Bloomberg , ABML Research SSS -Qtrly Net Sales 25 Post subprime crisis, healthy SSS 21.0 22.0 30000 … leading to superior topline 27448 40 growth reflects return of purchasing growth over FY11-FY13E period 20 power and hence organic growth 16.0 13.0 14.0 25000 21205 15 30 18417 20000 10 7.0 7.0 15024 % 5 2.3 2.1 7.0 s mn 15000 11544 13385 20 R 0 10000 10 (5) (3.0) (4.0) 5000 (6.3) (10) 0 0 9 9 9 9 0 0 0 0 1 1 1 1 2 Y0 Y0 Y0 Y0 Y1 Y1 Y1 Y1 Y1 Y1 Y1 Y1 Y1 FY08 FY09 FY10 FY11 FY12E FY13E F F F F F F F F F F F F F Q Q Q Q Q Q Q Q Q Q Q Q Q 1 2 3 4 1 2 3 4 1 2 3 4 1 Net sales (LHS) YoY% Source: Bloomberg , ABML Research Source: Bloomberg , ABML Research • Topline expansion primarily depends on (a) volume growth, which in turn will be due to new store addition and growth in existingstores and (b) pricing growth, which in turn will be due to pass thru effect of inflation and pricing power in some exclusive brand. • We expect net sales to increase by 15.1% and 29.4% to `21204.8 mn and `27447.8 mn in FY12E and FY13E respectively. 10