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TEAM ID – 2301 Shoppers’ Stop Ltd.

Recommendation: Accumulate Market Cap: Rs Cr. 2256

Price: Rs 660.0 H I G H L I G H T S:
• Shoppers’ Stop (SS) is the leading department store company in
12 Month Price Objective: Rs691
India. It has built robust management systems to capitalize on
the growth potential in the organized retail space, particularly
Estimates 2007E 2008E 2009E
the department store segment. However, the stock has priced in
Net
343.4 489.0 675.4 the bulk of its upside potential leaving little room for positive
income
EPS 10.0 14.2 19.6 surprise, in our view. We recommend an Equal-weight rating on

P/E 66 46.5 33.67 the stock with a target price of Rs 691


EPS • SS enjoys a unique advantage of having a strong presence in the
36.98 42 38.03
Growth % niche department store segment, which is likely to face limited
ROE 9.5 12.4 14
competition from both foreign and domestic players. In our
(Rs. in million)
view, income elasticity in this business segment is high, and as
India per capita incomes grows, SS should capitalize on its
Investment Argument
growth potential. The company has a strong, loyal customer
• Fairly priced, Quality Company
• Best department store play base, relatively high earnings visibility and low business risk, in
• Expansion in new segments to our view. Efficient business systems, better/standard company-
add value wide business practices and a balanced portfolio lowers SS’s
• Rapid Store Expansion Driving
Growth business risk.
• Strong Loyal Customer Base • SS plans to enter new segments such as home improvement and
Built
hypermarkets (not captured in our earnings estimates). These
• High Earnings Visibility
• Low risk company can give up further upside to the stock if successful.
• • Given the 30% growth predicted in organized retail and SSL’s
Shareholding Pattern (%) retail expansion plans, we expect the company to record a
Promoters 67.06 revenue CAGR of 31.6% on a consolidated basis over the next
FIIs/NRIs/OCBs/GDR 6.82
MFs/Banks/FIs 13.65 3 years. The stock is currently trading at 58x our FY07E EPS of
Non Promoter Corporate 5.03 Rs.10 and 41x FY08E EPS of Rs.14. We estimate the DCF
Public & Others 7.44
value of the company at Rs691. Since the stock is trading at
around Rs660 it leaves a limited upside of 4.69 %.
Company background

Shoppers’ Stop is promoted by the K Raheja Corp Group, one of


leading players in real estate development and hotels. Shoppers’ Stop
has progressed from being a single brand shop to a family orientated
fashion and lifestyle store. Shoppers’ Stop operates under the
departmental store format, and was one of the pioneers of the large-
format stores in India. Shoppers’ Stop has created a new business unit
to manage its specialty businesses like Crossword, Mothercare, F&B
business and MAC.
Shoppers’ Stop: Represented Across Most Retail Segments

Exhibit 1, Source: Company Data


Management Structure
The Chandu Raheja group holding structure is the promoter of
Shoppers Stop with only the retail arm of the group listed.

Exhibit 2, Source: Company Data

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Shopper’s Stop flagship store
Shopper’s Stop flagship store has 20 stores with just under a 1 million
Shoppers’ Stop flagship
store has 20 stores with
square feet spread across top 10 cities. Apparel contributes around
just under a 1 million
square feet spread across
60% of sales, while home, leather accessories, watches, jewellery and
top 10 cities.
others forming the non apparels segment. SS has a private label
program that contributes around 19-20% of sales.

Exhibit 3, Source: Company Data


Some of the private label brands:

Exhibit 4, Source: Company Data


First Citizen Program
Shoppers’ Stop first citizen program is a membership program where
customers pay Rs150 to become a member and avail value added
benefits.
HOME Venture– Good Potential
Shoppers Stop has recently ventured into the home furnishing segment
through its HOME venture stores.

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Experimenting with the Hypermarket Segment
SS’s group company Rainbow Retail Private Ltd set up the first
SS’s group company
Rainbow Retail Private hypermarket store has opened in Mumbai with 120,000 sq ft of
Ltd set up the first
hypermarket store has retailing space. It plans to have 7-8 stores operational by F08.
opened in Mumbai with
120,000 sq ft of Apart from these Shoppers’ stop is also present in the books segment
retailing space.
through Crossword chain of stores. It has recently tied up with
Mothercare through the franchise route, thus giving Shoppers’ Stop an
advantage of synergy.

Shareholding pattern
Promoters holding in SS haven’t undergone any change since listing,
with Promoters continuing to hold 67% of total share outstanding.

Public Others
5% 7%

Mutual funds
Banks and Fis
14%

FIIs
Promoters
7%
67%

Exhibit 5, Source: Company Data

4
Industry Analysis

India has been rated as the most attractive destination globally by a


survey of global retailers carried out by AT Kearney. The retail
industry was pegged at USD 226bn in 2005. Of this organized retail
accounted for just 3.4% of the overall retail pie. This is estimated to
reach 10-12% by 2010.

Exhibit 6, Source: KSA Technopak & Company Data

India Retail Highlights


The share of the
organized retail market is Highlights of the Indian retail sector over 2001, 2005 and the
expected to rise to a
whopping 10% of the projections for the next five years show an immense potential for this
entire retail sales
amounting to Rs.31 bn by sector. The share of the organized retail market is expected to rise to a
2010.
whopping 10% of the entire retail sales amounting to Rs.31Bn by
2010.

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Exhibit 7, Source: Company Data
Key growth drivers
Favorable demographics, rising income as a trickle down effect of the
rising GDP are among the major reasons for the retail boom.

Exhibit 8: Retail Boom


Rising consumer income:

5 11 22
100%
93
80% 150
230
60%
94
40% 98
40 77
20%
30 22 17
16 10
0%
1995-96 2000-01 2006-07

Destitue Aspirants Climbers Consuming Class Very Rich

Exhibit 9, Source: Company Data

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The figures show that the income distribution of the country is not
growing in a triangle form but a diamond form. This can be seen by
the rapid growth of the Consuming class in the figure.
Levels of Retail:
While organized retail is possible in many categories, extent of its
growth varies according to category. Organized retailers can operate as
specialized chains catering to a particular category of retail or can be
present in more than one retail category through a department store,
hypermarket, etc.

Exhibit 10, Source: Company Data


• Level 1 - Returns in food and grocery score over Apparel
category
• Level 2 – Offers higher returns and has a faster payback
period.
Factors affecting profitability in organized retail are:
• Revenue per square foot
• Store size
• Gross margins – share of private labels
• Lease rentals/Operational costs/ Capital costs

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Investment Thesis
Sizing the Department Store Market
Department stores cover a wide product range, typically included
under the categories of apparel, footwear, personal care, and
electronics. However, department stores typically focus on brands with
an emphasis on the affluent consumer. According to a study instituted
by Shoppers’ Stop the target market for department stores in the top 23
cities is around US$3-$5 billion. Indian consumers are likely to readily
accept the department store format, as their need for ‘aspirational
products’ has historically been satisfied through single product outlets
offering a significantly poorer shopping experience.
Potential for departmental stores market

16%
apercentage of total retail sales
Departmental store sales as

14%
12% China Malaysia South Korea

10%
8%
6%
Thailand
4%
2% Indonesia

0% India
0 2000 4000 6000 8000 10000 12000

Per Capita Disposable Income

Exhibit 11, Source: AT Kearney


Department stores have been one of the high growth retail segments in
Asia in the past few years. Improvement in incomes and higher
aspirations are drawing consumers to increasingly shop in department
stores. Given the early stages of retail development in India, new
department stores provide a great way for consumers to aggregate their
shopping experience in a single location.
Rapid Store Expansion Driving Growth
Shoppers’ Stop has planned an expansion plan by which it should have
around 48 stores operating by the end of 2009. This translates to
around 31mn sq ft space.

8
60

48
50

39
40

29
30

20
20 16
14
12
10 9
7
5

0
FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07E FY08E FY09E

Exhibit 12, Source: Company Data


Product Brand Proliferation Likely to Benefit SS
In the past, most retailing companies in India couldn’t fill shelf space
due to a lack of variety and availability in branded products. However,
availability of branded products has increased sharply as Indian
companies have invested in brand building to match the aspirations of
consumers and foreign brands have increased through the franchisee
route or direct exports.

160
160 138

140 114
120
100
80
60
17 22
40 15

20
0
F2000 F2002 F2004

Exhibit 13, Source: AC Nielson


Strong Loyal Customer Base Built
SS has the strongest brand in the department store format in India, in
our view. Its strong brand has been built on offering a wide range of
products under one roof and the high quality service provided to
customers. We see this as a key differentiator and competitive strength
of SS, which will act as an entry barrier to competition.

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Loyal Customer Base Steadily Rising
Loyalty Contribution of
Customers sales
Jun-04 307,331.00 About 50%
Mar-05 410,000.00 Over 50%
Sep-05 500,000.00 Around 51%
Oct-05 540,000.00 Around 60%
Dec-05 608,000.00 Upto 60%
Mar-06 632,000.00 About 62%
Exhibit 14, Source: Company Data
Foreign Competition Likely to Remain Low
Foreign competition in the department store segment should remain
limited, at least for the foreseeable future, as most large players do not
have a strong international strategy. However, domestic competition
could mushroom given the attractiveness of the industry in India.
Internal Sales Outside Home Market for Top Three Global
Players per Retail Segment 2004
70%

60% 58%

50%

40%

30%
22%
19%
20%
12%
10% 8% 8%

0%
Deparment Home Consumer Hard Apperal Grocery
Store Improvement Electronics Discounter

Exhibit 15, Source: AT Kearney


Conservative Financial Management
The company’s philosophy is centered on keeping its total leverage
under control. Total fixed operating cost as a percentage of gross
margin is quite high in the department store business, resulting in high

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operating leverage. Consequently, the company aims to balance this
risk with lower financial leverage, thereby maintaining a lower debt to
equity ratio – although this also limits growth potential.
Lower Rental Costs - A Competitive Advantage
Rental costs, at least for SS’s department stores, are under control for
stores being developed in the next 2 years. In our view, lower rental
costs are likely to be a key first-mover advantage for SS considering
the recent sharp increase in rental costs.
Departmental Stores: Net Margin Comparison:

3.40% 3.50%
3.50%

3.00%

2.50% 2.20%
2.00%

1.50%

1.00%

0.50%

0.00%
Shopper's
Industry
Stop Industry
Mean
Median

Exhibit 16, Source: Company Data


High Earnings Visibility
We see limited risk to earnings forecasts as SS has clear visibility for
the next 3-4 years. A steady increase in store numbers through a tried
and tested format (department store), limited competitive threat and
relatively low financial risk enhance earnings visibility.
Strengthening Dominance in Select Cities
SS is strengthening its dominance in selected cities to improve its
brand. The company has identified 21 cities where it will set up new
stores with an estimated potential market of Rs150-200 billion.
Dominating key cities will help the company amortize brand-building
cost over larger number of stores, while building customer loyalty
from improved store access.

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Strong Presence Around 3 Key Cities

Exhibit 17, Source: Company Data


Focused on Delivering and Measuring Customer Service
The number of awards and recognition the company has received for
its brand and customer loyalty from industry observers also
demonstrate its brand strength. The company also uses a Customer
Satisfaction Index based on consumer surveys, which are also used for
strategic planning.

Award Conferred By Year

Bet Individual Retail


CMAI 2002, 2004
Outlet
Super Brand Status Super Brands Council 2003-05
Most Preferred Retail
Lycra Images Forum 2004
Chain
Most Admired Retail Images Fashion
2005
Destination Forum
Most Admired
Images 2006
Shopping Destination
Shoppers’ Stop Awards for Brands/Retail Formats
Exhibit 18, Source: Company Data

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Satisfied Set of Customers

64.00
63.00 62.40 63.20
62.00 62.50
61.00
60.30 61.00
60.00
59.00 58.20
58.00
57.00
56.00
55.00
May-02 Dec-02
May-03 S1
Dec-03
Aug-04
Jan-05

Exhibit 19, Source: Company Data

Training Employees to Deliver Customer Satisfaction


SS relies heavily on employee training and managing employee
satisfaction to maintain its most important competitive advantage,
quality of service.
Shoppers’ Stop – Employee Satisfaction Index

80
76.4

70 64.9

60 55.6

50

40
Dec-02 Dec-03 Dec-04

Exhibit 20, Source: Company Data


Offering Trust in Price and Quality versus ‘Mom and Pop’
SS has been able to successfully capitalize on this need for trust and
has built strong brand equity with loyal customers. However, this USP
may have to be reinvented quickly once SS sees competition in its own
format.

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Higher Entry Barriers Than Hypermarkets
Department stores focus on merchandising and service as the key
unique selling proposition (USP) and differentiators in their business.
Although the differentiators appear easy to replicate, the reality is
different. SS has built systems and procedures for sustaining and
improving its service quality, a key differentiator, in our view.

Brand Owned By

Shoppers' Stop Shoppers' Stop


Central Pantaloon Retail
Lifestyle Pyramid
Exhibit 21: Key Department stores in India
Preferred Partner for Foreign Players
SS is the preferred partner/retailer for foreign brands entering India.
The company has already signed an agreement with UK retailer
Mothercare to retail their products. The company has tied-up Estee
Lauder’s MAC brand of cosmetics with one strongly performing outlet
opened so far. SS has also tied up with Austin Reed for both
manufacturing and retailing its brand in India. We expect many more
opportunities for similar tie-ups, particularly as the government has
allowed up to 51% FDI in single brand retailing.
Targeting Further Improvement in Efficiency
The company manages in excess of 0.25 mn SKUs with four
distribution centres catering to all their stores. The company’s
distribution and logistics set up is networked to deliver merchandise to
the store within 48 hours of receipt/generation of auto replenishment
order.
Private Label Contribution to be Limited to 25%
The company is not keen to increase private label contribution beyond
25% in F08, as it wants to keep its inventory level under control and
lower the potential overall risk for the company.

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25.00%
20.10%

18.40%
20.00% 18% 19%
16.00%

15.00%

10.00%

5.00%

0.00%
S1
FY02
FY03
FY04
FY05
FY06

Exhibit 22, Source: Company Data Limited Private Label Expansion –


Managing Risk
Strong Growth Likely
We expect earnings growth at 41.12% CAGR in F2006-09 driven by a
combination of new store openings. SS revenues are expected to grow
at 45.67% CAGR during the period F2006-09. Operating profit margin
is likely to fall by 11bps due to increased employee costs. The
company has sufficient surplus build capacity at the central office to
accommodate its growth until F08. Therefore, net profit margin should
be sustainable as a significant plan of retail operation expansion in the
same period is charted out.
SS – Net Profit Margin to be sustained

4.650% 4.151%
4.150%
3.709%
3.650% 3.372%
3.143% 3.127% 3.116%
3.150%
2.650%
2.150%
1.650%
1.150%
0.650%
0.150%
FY04 FY05 FY06 FY07E FY08E FY09E

Exhibit 23, Source: Company Data, Projections

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Efficiently Managed Company
Shoppers’ Stop (SS) is a well run company with strong systems and
procedures in place. The company has created a Manual of Authorities
(MOA), which governs decision-making authority. It has also created
a Standard Operating Procedures (SOPs) manual to govern most
activities from site selection, store planning, store operations, buying
and merchandising, distribution, and logistics

SWOT Analysis of Shopper’s Stop

Strengths Weakness
Pioneer in departmental format Competition from standalone specialty
stores
Loyal customer base
Late foray into value retailing with 51%
Low risk and sturdy business model stake in promoter owned company

Healthy financial position, low gearing High spend on store makeovers and
interiors to ensure a pleasant shopping
Presence across retail segments, lifestyle, experience
value and specialty retailing

Opportunities Threats
Expected 30% CAGR in organized retail to Employee shortage and attrition due to
result in better footfall and conversion rates rapid growth in retailing

Entry into Tier 2 and Tier 3 cities Impact of slowdown in consumer spend to
be felt on department stores
Collaboration with foreign players because of
a national brand Opening up of economy for free entry of
foreign players

Exhibit 24, Source: Company Data, Projections

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Investment Concerns

Format is Vulnerable to Economic Environment


Department store sales are more vulnerable to changes in the macro
environment than most other retailing formats. Since most product
categories in a department store are consumer discretionary, a potential
slowdown in the economy could adversely affect the company. On the
flip side, however, an improved macro environment and feel good
factor in the economy would help boost its same-store growth rate.
Differentiating Product Offering - Key Challenge
We believe SS will face an increasing risk of commoditization unless
it is able to differentiate its product offering by constantly improving
its quality of service.
Competition from Fragmented Players
Although SS is likely to face limited competition in the department
store format from large national players, the competitive threat from
single-store owners could increase.
Failure Risk in New Businesses
If the company is not able to scale up the new businesses profitably
and successfully, it could affect valuation and profitability.
Stores Makeover Costs Could Hurt
The company may have to refurbish its stores much faster than
anticipated. This could result in additional expenses and loss of sales
during refurbishment.
Employee Costs Likely to Rise
Although the company is continuously training people, rising
competition is likely to put pressure on the company’s employee cost.
High employee turnover and unavailability of sufficiently trained
manpower are likely to put pressure on the company’s ability to grow.

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Exhibit 28, Source: Company Data, Projections Rising Employee Costs

Valuations
Valuing the Retail Opportunity
India’s retail industry is at an evolutionary stage. In our view, the
industry is likely to undergo significant transformation with respect to
competition, market players and margin profile. It is difficult to
estimate the potential evolution of the business during this transition
period. Hence, any intrinsic value calculation for retail companies is
fraught with risk that companies falter or overachieve on growth
expectations. However, we believe that retailing will eventually grow
into a sizeable industry, and the global experience suggests that most
players will be reasonably profitable.
Wide Range of Intrinsic Values
As retail is potentially a high growth sector with most of its value
driven by future expectations, intrinsic value is likely to be quite
sensitive to growth assumptions. In our view, an intrinsic value range
is more appropriate for this company than a single point estimate.
Discounted Cash Flow Analysis
We estimate the DCF value range to be about Rs600-700 per share,
contingent on our growth assumptions. However, if we assume that,
due to competitive pressures, the company is not able to deliver strong
growth beyond F09 and growth falls significantly below nominal GDP
growth – say at 5% p.a. – its DCF value works out at Rs298 per share.
(refer Appendix for the details). The intrinsic value of Shoppers’ Stop
works out to Rs.691.18 leaving an upside of 4.69% (CMP: Rs. 660).

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APPENDIX

SS: Projected Profit and Loss Account: F2004 to F2009E

(Rs. in million)
FY04 FY05 FY06 FY07E FY08E FY09E
Income
Retail turnover
Own merchandise 3,090.2 4,237.7 6,295.0 10,710.4 15,300.6 19,501.9
Consignment merchandise 952.5 1,084.5 832.2 1,415.9 2,022.7 2,578.1
Other retail operating income 80.4 76.0 116.3 197.8 282.6 360.2
4,123.1 5,398.2 7,243.5 12324.072 17605.915 22440.24
Less: VAT set off 0.0 113.7 316.5 874.8 1,455.3 1,986.7
Less: Cost of consignment
merchandise 708.2 797.5 582.2 696.0 691.9 656.7
3,414.9 4,487.0 6,344.9 10,753.3 15,458.7 19,796.9
Franchise 113.6 0.0 0.0 0.0 0.0 0.0
Other income 21.2 11.7 77.8 36.9 42.1 52.3
3,549.6 4,498.7 6,422.7 10,790.2 15,500.8 19,849.2
Expenditure
Cost of goods sold 2,136.0 2,820.8 4,035.2 7,118.7 10,351.2 13,309.8
Employee costs 241.6 311.2 436.2 765.1 1,102.2 1,410.8
Operating and administrative
expenses 914.6 1,011.2 1,386.6 2,101.1 2,909.5 3,637.0
Interest and finance charges 40.9 39.7 28.1 76.2 104.5 103.0
Depreciation and amortization 94.9 111.9 165.8 232.8 323.0 404.2
3,428.0 4,294.8 6,052.0 10,294.0 14,790.5 18,864.8

Profit before tax 121.7 203.9 370.7 496.2 710.4 984.4


Tax charges 10.1 17.2 132.5 158.8 227.3 315.0

Profit after tax 111.6 186.7 238.2 337.4 483.0 669.4


Minority interest (in Crossword) 6.2 2.6 4.5 6.0 6.0 6.0
Net profit for the year 117.8 189.3 242.7 343.4 489.0 675.4
Share capital 274.2 274.2 343.8 343.8 343.8 343.8
Earning per share
Basic 4.4 6.9 7.3 10.0 14.2 19.6
Diluted 4.3 6.9 7.3

EBITDA 257.5 355.5 564.7 805.2 1,137.9 1,491.6


EBIT 162.5 243.6 398.8 572.4 814.9 1,087.4

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SS: Projected Balance Sheet: F2004 to F2009E

(Rs. in million)
FY04 FY05 FY06 FY07E FY08E FY09E
Sources of funds
Shareholders' funds
Share capital 274.2 274.2 344.0 344.0 344.0 344.0
Reserves and surplus 572.9 631.7 2,285.2 3184.6 3527.9 4425.8
847.1 905.9 2,629.2 3528.6 3871.9 4769.8
Minority interest 50.3 62.4 0.0 0.0 0.0 0.0
Loan funds
Secured loans 552.5 580.7 608.7
Unsecured loans 50.0 320.0 26.0
602.5 900.8 634.7 1411.4 1935.9 1907.9
Deferred tax liability 0.0 0.7 3.6
1,499.9 1,869.8 3,267.5 4940.0 5807.8 6677.7
Application of funds
Fixed assets
Gross block 1,192.6 1,442.1 1,866.2 2873.9 3987.7 4990.1
Less: Accumulated depreciation -353.0 -459.2 -564.5 -878.2 -1218.5 -1524.8
Net block 839.6 982.9 1,301.7 1995.7 2769.2 3465.3

Capital work in progress (including


capital advances) 58.2 236.2 86.6 450.0 650.0 750.0
897.8 1,219.0 1,388.3 2445.7 3419.2 4215.3
Goodwill on consolidation 0.0 12.6 96.3 433.0 569.6 997.1
Current assets, loans and advances
Inventories 562.2 629.4 737.0 1170.2 1701.6 2187.9
Sundry debtors 61.7 64.8 92.6 135.1 192.9 245.9
Cash and bank balances 14.7 14.9 1,137.9 1100.0 700.0 100.0
Loans and advances 483.2 667.0 765.4 957.3 1407.8 1738.9
1,121.8 1,376.2 2,733.0 3362.5 4002.3 4272.8
Less: Current liabilities and provisions
Current liabiliies 643.3 710.3 891.5 1267.7 2127.0 2734.9

Provisions 0.5 31.5 58.8 33.6 56.4 72.5


643.8 741.9 950.3 1301.3 2183.3 2807.4
Net current assets 478.0 634.4 1,782.7 2061.2 1819.0 1465.4

Miscellaneous expenditure 8.7 3.8 0.0 0.0 0.0 0.0


Profit and loss account 115.4 0.0 0.0 0.0 0.0 0.0
Total Assets 1,499.9 1,869.8 3,267.4 4940.0 5807.8 6677.7

Current assets + fixed assets 2,019.6 2,595.3 4,121.3 5358.3 6771.5 7738.0

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SS: Projected Cash Flow F2004 to F2009E

(Rs. in million)
FY04 FY05 FY06 FY07E FY08E FY09E
Sources of funds
Shareholders' funds
Share capital 274.2 274.2 344.0 344.0 344.0 344.0
Reserves and surplus 572.9 631.7 2,285.2 3,184.6 3,527.9 4,425.8
847.1 905.9 2,629.2 3528.5679 3871.8821 4769.7823
Minority interest 50.3 62.4 0.0 0.0 0.0 0.0
Loan funds
Secured loans 552.5 580.7 608.7
Unsecured loans 50.0 320.0 26.0
602.5 900.8 634.7 1411.4272 1935.941 1907.9129
Deferred tax liability 0.0 0.7 3.6
1,499.9 1,869.8 3,267.5 4,940.0 5,807.8 6,677.7
Application of funds
Fixed assets
Gross block 1,192.6 1,442.1 1,866.2 2873.925 3987.675 4990.05
- - -
Less: Accumulated depriciation -353.0 -459.2 -564.5 878.17664 1218.5019 1524.7946
Net block 839.6 982.9 1,301.7 1995.7484 2769.1731 3465.2554

Capital work in progress (including


capital advances) 58.2 236.2 86.6 450.0 650.0 750.0
897.8 1,219.0 1,388.3 2,445.7 3,419.2 4,215.3
Goodwill on consolidation 0.0 12.6 96.3 433.0 569.6 997.1
Current assets, loans and advances
Inventories 562.2 629.4 737.0 1170.202 1701.5699 2187.9162
Sundry debtors 61.7 64.8 92.6 135.05832 192.94153 245.92043
Cash and bank balances 14.7 14.9 1,137.9 276 18 12
Loans and advances 483.2 667.0 765.4 1781.2834 2089.8211 1826.9216
1,121.8 1,376.2 2,733.0 3362.5437 4002.3326 4272.7583
Less: Current liabilities and
provisions
Current liabiliies 643.3 710.3 891.5 1267.7188 2126.9624 2734.8953
Provisions 0.5 31.5 58.8 33.6 56.4 72.5
643.8 741.9 950.3 1,301.3 2,183.3 2,807.4
Net current assets 478.0 634.4 1,782.7 2,061.2 1,819.0 1,465.4

Miscellaneous expenditure 8.7 3.8 0.0 0.0 0.0 0.0


Profit and loss account 115.4 0.0 0.0 0.0 0.0 0.0
1,499.9 1,869.8 3,267.4 4,940.0 5,807.8 6,677.7

Total Assets 2,019.6 2,595.3 4,121.3 5358.292 6771.5057 7738.0137

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SS: Ratio Analysis F2004 to F2009E

FY04 FY05 FY06 FY07E FY08E FY09E

Liquidity ratios
Current Ratio 1.742 1.855 2.876 2.343 2.405 2.481
Quick Ratio 0.869 1.007 2.100 1.526 1.594 1.675
Leverage ratios
Long Term Debt-Equity Ratio 0.711 0.994 0.241 0.400 0.500 0.400
Total Debt-Equity Ratio 1.471 1.778 0.580 0.759 1.049 0.973
Debt-Asset Ratio 0.617 0.621 0.370 0.500 0.600 0.600

Coverage Ratios
Interest coverage ratio 3.978 6.135 14.188 7.510 7.795 10.555
Debt service coverage ratio 6.054 8.519 15.374 8.481 8.710 11.420
Turnover ratios
Inventory turnover 3.799 4.481 5.475 6.083 6.083 6.083
Accounts receivables turnover 66.846 83.305 78.198 91.250 91.250 91.250
Total Assets turnover 2.042 2.080 1.758 2.300 2.600 2.900
Profitability ratios
Gross profit margin 0.423 0.420 0.383 0.360 0.349 0.344
Operating profit margin 0.202 0.232 0.191 0.190 0.184 0.182
Net profit margin 0.031 0.042 0.037 0.031 0.031 0.034
Return on investment 0.080 0.094 0.097 0.099 0.110 0.128
Return on networth 0.132 0.206 0.091 0.096 0.125 0.140
Leverages
Degree of financial leverage 1.336 1.195 1.076 1.154 1.147 1.105
Sales 4123.090 5398.160 7243.490 12324.072 17605.915 22440.240
Sales Growth (%) 30.925 34.184 70.140 42.858 27.459
EBITDA 257.470 355.500 564.650 805.182 1137.905 1491.607
EBITDA Growth (%) 38.074 58.833 42.598 41.323 31.084
EBIT 162.540 243.630 398.830 572.394 814.903 1087.413
EBIT Growth (%) 49.889 63.703 43.518 42.368 33.441
RONW 0.132 0.206 0.091
Sales/Total assets 2.042 2.080 1.758 2.300 2.600 2.900
Sales/Net fixed assets 4.911 5.492 5.565 5.412 5.474 5.473
Debtor Turnover (days) 5.460 4.381 4.668 4.000 4.000 4.000
Inventory turnover (days) 96.071 81.447 66.666 60.000 60.000 60.000
Creditor turnover 109.926 91.914 80.635 65.000 75.000 75.000
Total debt/equity 1.471 1.778 0.580 0.759 1.049 0.973
EPS 4.360 6.910 7.270 9.988 14.225 19.645
Number of shares 27.422 27.422 34.383 34.380 34.380 34.380
Net worth 847.100 905.890 2629.220 3528.568 3871.882 4769.782
BV/share 30.891 33.035 76.469 102.634 112.620 138.737
FCFS 4.521 5.617 11.106 9.676 22.009 27.200
P/E 136.537 86.151 81.884 59.599 41.850 30.303
P/BV 19.271 18.020 7.785 5.800 5.286 4.291

22
Factor and Regression Analysis

regression for area in


square ft.
constant(a) -494570 b 76288.483
regression for revenue
constant(a) -1294.623 b1 0.007041 b2 179.258
regression for cost of goods
sold
constant(a) -423.603 b 0.612
regression for employee
costs
constant(a) -20.979 b 0.06257
regression for operating
and administrative exp
constant(a) -243.129 b 80.836
regression for total assets
constant(a) -355.95 bf 111.375

(Rs. in million)
FY04 FY05 FY06 FY07E FY08E FY09E
No. of stores 14 16 20 29.00 39.00 48.00
Area in sq. ft 634647 726045.728 950701 1717796.01 2480680.84 3167277.18
GDP 8 8.5 8.3 8.50 8.00 8.00
Revenues 4123.1 5398.2 7243.5 12324.07 17605.91 22440.24
Forecast of Cost
of Goods sold 2,136.0 2,820.8 4,035.2 7118.73 10351.22 13309.82
Forecast of
employee costs 241.6 311.2 436.2 750.14 1080.62 1383.11
Factor for increase
of eployee costs
due to competition 1 1 1 1.02 1.02 1.02
Employee costs 241.58 311.24 436.22 765.14 1102.24 1410.77
Operating and
administrative
expenses 914.6 1,011.2 1,386.6 2101.12 2909.48 3637.00
Loan amount 602.5 900.8 634.7 1411.43 1935.94 1907.91
Interest 40.9 39.7 28.1 76.22 104.54 103.03
Gross block 1,192.6 1,442.1 1,866.2 2873.93 3987.68 4990.05

23
Calculation of Risk Free Rate of
Return (RF)

We have taken the redemption yield on


medium term GOI securities to calculate
the risk free rate of return. Calculation of Beta
Annual (gross)
redemption yield of Shopper's
Year Government of India Average S&P CNX Nifty
Stop
securities Medium
Mean Price 2919.208824 473.7235294
term (5-15 years)
1995-96 5.75-14.07 9.91 Rmarkets, RSS 0.03822395 0.033257091
1996-97 5.75-14.44 10.095 Variance 88.89659052 30.99892191
1997-98 5.20-14.00 9.6
1998-99 5.75-13.74 9.745 Covariance (S&P CNX Nifty,SS) 17.73109944
1999-00 6.50-13.84 10.17
2000-01 9.37-12.50 10.935 Beta Calculation based on one years data
2001-02 5.14-13.85 9.495
2002-03 5.60-9.27 7.435 Beta SS-S&P
0.571990842
2003-04 4.41-6.78 5.595 CNX Nifty
Dates: 23rd May 2005 to 17th Oct 2006
2004-05 4.71-7.73 6.22
RFR 8.92

Calculation of Market Returns (RM)


We have taken 10 year duration to
calculate the market returns. Calculation of Weighted Average Cost
of Capital (WACC)
Closing price of
S&P CNX Nifty Returns
Year
on 30 Sept of (%)
each year RFR 8.9200

1996 936.27
Beta 0.5720
1997 1123.8 20.0294787 Risk premium 9.2037
1998 904.95 -19.4741057 Cost of equity (ke) 14.1845
1999 1413.1 56.1522736 Cost of debt (kd) 9.0000
2000 1271.65 -10.0099073 Tax rate 0.3200
1-tax rate 0.6800
2001 913.85 -28.1366728
Post tax cost of debt (%) 6.12 6.1200
2002 963.15 5.39475844 WACC 12.7809
2003 1417.1 47.1318071
Target Debt/Equity 0.4000
2004 1745.5 23.1740879
Debt weightage 0.285714
2005 2601.4 49.0346606 Equity weightage 0.777778
2006 3588.4 37.9411086
Mean
18.12374891
returns
Valuation Based on Three Stage FCFF Model

Growth Rate Time Frame Duration


High Growth Phase 15% FY10-FY21 12
Declining Growth
Phase declining @ 3% FY22-FY24 3
FY25
Stable Growth Phase 6% onwards infinite

FY07 FY08 FY09 FY10 FY11 FY12


FCFF 332.6559803 756.6724911 935.1392324 1075.410117 1236.721635 1422.22988
PV of future cash
flows 294.9576515 594.8899171 651.8824236 664.7088226 677.7875931 691.1237007

FY13 FY14 FY15 FY16 FY17 FY18


FCFF 1635.56436 1880.899016 2163.033869 2487.488949 2860.612292 3289.704135
PV of future
cash flows 704.722209 718.5882802 732.7271796 747.1442752 761.8450407 776.8350575

FY19 FY20 FY21 FY22 FY23 FY24


FCFF 8709.162776 10886.45347 13608.067 16238.96 18458.284 19934.947
PV of future cash
flows 1823.529169 2021.096542 2240.069 2370.2137 2388.8284 2287.5629

FY19 FY20 FY21 FY22 FY23 FY24


FCFF 3783.159756 4350.633719 5003.2288 5603.6162 6107.9417 6474.4182
PV of future cash
flows 792.120017 807.7057224 823.59809 817.89525 790.47568 742.9485

Terminal Value 101208.5956


PV of Terminal Value 11613.82725

PV of total cash flows 24405.78267


Market value of debt 650
FCFE 23755.78267
Sensitivity Analysis
Target price per share 691.1778489
Terminal High growth rate
Growth
rate 5 10 15 20 25
4 269.51 396.12 598.56 920.6 1428.9
5 281.89 418.77 638.92 990.84 1548.4
6 297.92 448.09 691.17 1081.8 1703.3
7 319.5 487.55 761.5 1204.2 1911.7
8 350.1 543.51 861.24 1377.7 2270.2

25

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