The $250 billion retail market in India, which remains abysmally under penetrated by the organised sector, is set for a huge transformation with corporate behemoth Reliance Industries' multi-billion dollar investment foray into this segment, says a leading equity research firm in Asia-Pacific.
RIL's proposed retail venture Reliance Retail Ltd might garner five per cent of the country's overall retail market with revenues of $20 billion (about Rs 90,000 crore) in 6-7 years, even on conservative estimates, CLSA Asia-Pacific Markets said in a latest report.
CLSA said that its valuation estimates indicates that when the venture reaches this revenue target, it could garner a market capitalisation of $17.5 billion (about Rs 78,750 crore) based on today's peer multiples.
It said that while Reliance is reported to have a much more aggressive target of reaching the $20 billion revenue in just four years, it has modelled a more conservative and gradual ramp-up that will see the target being achieved in seven years.
The projected revenue and market value figures could propel Reliance Retail right into the top league of India Inc within a few years as only five companies -- ONGC, RIL, NTPC, Infosys and TCS -- have higher market capitalizations currently.
CLSA said that the projected market cap figure for 6-7 years implies an un-risked current net value of $4.3 billion (nearly Rs 19,400 crore). This value puts Reliance Retail along with the country's top 30 companies in terms of market capitalisation even at current levels.
Reliance Retail could reach $1 billion in profits over 6-7 years and generate a return on capital employed (ROCE) of 15 per cent and return on asset employed (ROAE) between 18 and 20 per cent, it said.
The overall retail market could be worth $400 billion in the next seven years, based on a compounded annual growth rate of 8 per cent, which would put Reliance Retail's market share at 5 per cent, the report added.
CLSA said that even a decade of investments and execution by various companies have failed to transform India's retail market, which still remains highly fragmented and under penetrated by the organised sector.
RIL's huge investment proposal, estimated at $5-6 billion, would seek to leverage on the market's expected exponential growth as rising incomes and changing customer preferences drive penetration rates even higher, it added.
At the company's AGM held recently, RIL chairman Mukesh Ambani said: "Reliance Retail would, over time, entail an equity investment to the extent of Rs 10,000 crore ($2.2 billion) and would have to expend more than Rs 25,000 crore ($5.6 billion) in the years to come."
The company has already committed $750 million investment for its pilot retail project, which will be launched by end-2006 and would see 1,575 outlets coming over 3-6 months.
According to CLSA, the retail market is providing a perfect opportunity for large-scale corporate participation.
Apart from the existing players, who are looking to gain scale, several leading Indian companies, such as Bharti, and global majors like Wal-Mart, Tesco and Carrefour are also looking to leverage on the huge growth potential.
However, Reliance's investment ramp-up seems to have kept this in mind and it was expected to build scale before such competition emerges, it added.
While several corporates are looking to execute their own business strategies for the segment, lack of retail space and trained manpower has evolved as the key execution challenge. However, Reliance is looking to build a low cost entry strategy and a world class top management team to mitigate some of these concerns.
While full details of the retail plans are still sketchy, groceries appear to be the lynchpin and Reliance is building strong agri-linkages to complement its retail foray.
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