Professional Documents
Culture Documents
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
2
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.
3
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%
4
Industry Analysis
5
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.
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
6
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.
7
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
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
160
160 138
140 114
120
100
80
60
17 22
40 15
20
0
F2000 F2002 F2004
9
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
10
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
11
Strong Presence Around 3 Key Cities
12
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
80
76.4
70 64.9
60 55.6
50
40
Dec-02 Dec-03 Dec-04
13
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
14
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
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
15
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
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
16
Investment Concerns
17
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).
18
APPENDIX
(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
19
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
Current assets + fixed assets 2,019.6 2,595.3 4,121.3 5358.3 6771.5 7738.0
20
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
21
SS: Ratio Analysis F2004 to F2009E
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
(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)
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
25