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Put your money where you shop

N Mahalakshmi | April 25, 2005

More than a decade ago, shopping for clothes, perfumes, footwear and fashion jewellery - all under one roof -- in Mumbai meant going to just one shop. Shopper's Stop in suburban Andheri.

Today, Shopper's Stop has six stores in Mumbai. Add to that an equally large number of competing stores like Pantaloon, Lifestyle and Westside.

Fast forward to 2010. There will be 600-odd malls across the country, constituting nearly 10 per cent of total retail sales. That is great news not just for shoppers but also for investors in stocks.

The Rs 1,500 billion deal

The number of households with an income of over Rs 45,000 per annum is expected to grow from 58 million in 1999-2000 to 81 million this fiscal, according to a National Council of Applied Economic Research. All this will add a large number of households to the consuming class.

As credit card access becomes easier, people prefer to spend more in organised retail stores. The Reserve Bank of India estimates peg the growth of credit card transaction volumes at 119 per cent to 974 lakh (97.4 million) transactions last year from 445 lakh (44.5 million) transactions in FY03. The pace is expected to continue.

Of India's current 1 billion population, 47 per cent is under 20 years. Of that almost 160 million are in their teens. This youthful segment will explode to 55 per cent by 2015 with an even higher spending power. Add to this an increasing number of working women and the number of spenders is likely to explode.

The huge investments planned in real estate will increase the number of malls from 23 in 2003 to 600 by 2010. Cumulative retail space will grow from 40 million square feet to 100 million square feet, an annual growth of 46 per cent.

KSA Technopak estimates organised retail in India, thus, will account for 10-12 per cent of the total retail market by 2010 with sales of Rs 1400-1500 billion.

The retail sector offers better growth than any other sector including software, pharma or telecom. That's why investments in the retail companies sound really exciting in today's markets. So here we go, shopping for retail stocks.

Where Shopper's Stop

It's at 16 locations across nine cities, with a total shopping area of 752,000 square feet. One can pick up anything from branded apparel and cosmetics to books, music, electronics and toys. The hot selling item is apparel though (contributing 67 per cent to sales).

Of course, you get renowned brands like Louis Philippe, Levi's, Pepe, Arrow, Dockers, Lego and Mattel. You also get the store's private labels like STOP, Kashish, LIFE and Vettorio Fratini.

Shopper's also holds 51 per cent stake in Crossword Bookstores, a books and music retailing chain. Shopper's has about 400,000 loyal customers called First Citizen Club. They contribute to half of its retail sales.

By 2008, Shopper's plans to open 11 new stores, almost doubling its retailing space.

It also plans to renovate and expand some of its existing stores at an estimated cost of Rs 136 crore (Rs 1.36 billion) to be raised through the initial public issue. which will open on April 27, 2005. It wants to bring all its stores on par with the one at Mumbai's Inorbit mall, designed by the same architect who created Selfridges.

The best deals

Promoted by the K Raheja group, engaged in real estate business, the company benefits from the promoters' experience and relationships with developers. This helps Shopper's acquire preferred properties at competitive rates.

Also, Shopper's has the option of acquiring the food and value retailing business being built by its promoter's company Inorbit Mall by 2008 at a maximum price equal to the cost plus 10 per cent return on investment.

It has the best technology platform to manage its supply-chain, solid internal controls and a strong distribution and logistics network covering 82,000 square feet, handling over 260,000 stock keeping units per year, working round the clock.

Where is Trent?

Oh no. It's not called Trent. This Tata-owned company runs the Westside chain of departmental stores, which sells cloths, perfumes, jewellery and other accessories. All put together, Trent has around 16 stores with 380,000 square feet space.

Westside largely sells its private labels, which account for 80 per cent of total sales. Last November, Trent forayed into food retailing. Its first store opened in Ahmedabad and is branded Star India Bazaar. It plans to expand the chain in the years to come.

Overall, Trent plans to set up 17 new stores by 2008. Of this, eight are to be set up by March 2006. The company came up with a Rs 118 crore (Rs 1.18 billion) rights issue recently to finance its expansion plan.

Reward points

Sound management. The Tata brand equity is a plus.

Trent has a strong balance-sheet with cash of about Rs 100 crore (Rs 1 billion). Even the expansion will not put too much stress on the company's financials.

Trent largely sells in-store brands, which have better profit margins. Gross margins on private labels are around 45-50 per cent while the same for branded apparel is usually around 25-30 per cent.

Sales from private labels account for more than 80 per cent.

The Big Bazaar

Ah, this is the biggest of them all -- Pantaloon Retail. It runs three different kinds of stores -- Pantaloon, Big Bazaar and Food Bazaar. Pantaloon, largely for apparel, is pitched against Shopper's Stop and Westside.

Big Bazaar is a hyper-market, a discount store selling all kinds of items. Food Bazaar is where you can shop for food stuff, including vegetables and fruits.

How they compare
(In Rs ore)Shoppers @ 210Pantaloon @ 906Trent @ 586
Net sales542710906111218602600227338454
Net profit192739.2428012016.53242
EPS (Rs)6.67.711.4193755142229
P/E (x)31.8227.2718.4247.6824.4916.4741.8626.6420.21
M-cap to sales (x)1.331.020.81.560.930.673.392.281.7

Pantaloon also runs the Central Mall, large format premium departmental stores.  There are about 13 Pantaloon stores across eight cities, 13 Big Bazaars across nine cities and seven independent Food Bazaars, apart from the two Central Malls.

In the next two years, you will have another 40 stores. In all, the company has over 15 lakh square feet of shopping area now. By June 2007, it will have about 50 lakh square feet. Pantaloon now wants to expand its presence into entertainment and home improvement stores, too.

Recently, the company picked up stakes in Galaxy Entertainment (30 per cent stake after open offer) and Planet Sports (49 per cent stake). Galaxy runs bowling allays, restaurants and night clubs in Mumbai and has cash of Rs 21 crore (Rs 210 million) and is debt free.

Planet Sports has distribution rights for brands such as Wilson, Puma, Speedo and is the exclusive franchisee for Marks and Spencer in India. The company has 25 Planet Sports stores and six Marks and Spencer outlets in the country, with annual sales of Rs 50 crore (Rs 500 million).

Pantaloon recently announced a preferential issue of shares to Bennet, Coleman and Co at Rs 742, to raise about Rs 70 crore (Rs 700 million). It plans a capex of an additional Rs 120 crore (Rs 1.2 billion) over the next two years to be financed through internal accruals and debt.

Best bargains

The company has been able to sustain its first mover advantage till date. It promises the most aggressive growth.

Promoter and chief executive officer Kishore Biyani has a record of being at the right place at the right time. So Pantaloon stores ensure footfalls. These usually function as anchor stores for any mall, ensuring favourable rental rates.

Pantaloon posts huge sales from in-store brands. It sells its own brands in everything right from apparel, soaps, food items to electronic appliances like grinder and cooker.

Which one looks good?

Pantaloon offers the most aggressive growth. It has a presence in all the retailing segments appealing to your entire wallet. It has the highest sales and promises the fastest expansion. But then fulfilling this promise may not be easy.

It already has a stressed balanced-sheet with debt of Rs 245 crore (Rs 2.45 billion). And the company may not be able to expand as fast as it wants without either diluting more equity or adding more debt. Either way, the earnings for shareholder will be diluted.

For FY05, the company is estimated to clock sales of Rs 1,112 crore (Rs 11.12 billion) and by 2007, Rs 2,600-odd crore (Rs 26 billion). Its net profit for fiscal 2007 is likely to be in the ranges of Rs 120 crore (Rs 1.2 billion), indicating an earnings per share of Rs 55. The growth estimates are fairly aggressive. And the biggest downside to these estimates could be the execution risk.

Trent has been a slow starter but offers the best balance-sheet and steady growth. The company has lower operating margins despite higher sales of in-store labels.

Says Jamshed Desai, head retail advisory and strategy, IL&FS Investmart, "Trent is still two years away from peaking since it started its expansion binge only last year."

The five stores added last year and the seven stores which will be added in FY06 will break even and fully contribute to sales and profits only in FY07. Analysts expect the company to grow its topline to Rs 450 crore (Rs 4.5 billion) and earn about Rs 30 per share by FY07.

Despite being an early bird, Shopper's has not been able to consolidate its presence as well as Pantaloon. But it seems to have transcended its worst phase and looks to be on a steady growth path.

Though sales growth has not been as impressive in the past, in the next two years, sales are likely to double and so will the profits.

Based on trailing earnings valuations, Pantaloon looks most expensive and Shopper's looks the cheapest. Also, considering market-cap to sales, which is also a significant metric to look at for the retail business, Trent looks the costliest. Analysts widely differ on their preferences for companies in the sector.

Since all the companies are on a learning curve, it is difficult say which one will lead in the long run, say fund managers.

"Since the retail sector is still at a very nascent stage of growth, there is space for all companies to grow," says Alok Agarwal, analyst, Motilal Oswal.

But what if foreign direct investment is allowed? Will this mean competition and price wars? May be not. By the time FDI is allowed and international players decide to come, the prime properties may be occupied by local companies.

"Depending on the spread of malls, foreign players will have to either buy out local companies or enter into join-ventures to ensure they get a part of the growing pie," says Jamshed Desai. But who will sell out? Therein lies the Rs 1,500 billion question.

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