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India Equity Research | Retail

TheIndianretailstoryisfastgainingattentionontheglobalstagegoing
beyonditsopshopimage.WebelievetheimplementationofFDIandGST
would add to the bonanza, infusing a fresh momentum. Our recent
interactions with the industry and discussions at the India Retail Forum
indicatethatthesectorholdsimmensegrowthpotential.Indianretailers
are expanding in tier II and III cities, offering specialized products and
usingecommerce.We,however,areconcernedabouttheslackspending
seeninQ2FY12andexpectthefestiveseasontoperkupthemood.

Indiafavouriteformostretailers,unhurtbyglobaldownturn
A recent survey by CB Richard Ellis has pegged India as the prime nation to attract most
new retailers. The global downturn has made India more attractive from the retail view
point as retailers see it as a good growth prospect, least likely to be affected by
austerity measures. As more retail companies vie for space, availability of fresh, quality
real estate will become dearer. We reckon that Pantaloon, with its existing 15.24mn sq
ft operational space and a pipeline of 9mn sq ft incremental space, is well placed.

RetailersawaitFDI,GSTwithbatedbreath
The FDI is seen as a win-win for all from the farm gate to the retailer and eventually to
the consumer. It would have also helped the modern retail raise sizeable funds to
maintain growth. Though FDI is yet to be allowed, the government has relaxed norms,
enabling back-end partners to sell 100% products (earlier 25% of their turnover)
through the front-end partners. However, this does not address the scarcity of funds
for the front-end expansion a case in point being Pantaloons. GST on the other hand
would be a bigger game changer, providing the vital level playing field for all.

Bigretailershitvillageroads,devisestrategiestoconvertfootfalls
Big retailers are on an expansion spree entering markets of tier II and III cities while few
retailers have been successful in converting footfalls into loyal customers via loyalty
programmes (for Shoppers Stop, First Citizen members account for 72% of revenue).
Having realized the growing importance of e-commerce (low inventory and no rentals),
increasing number of retailers (E-Zone, electronic arm of future group) are resorting to
this medium to serve the modern customer better.

Challengesremaingalore AbneeshRoy
In spite of the retail sector possessing a huge growth potential, it is equally exposed to +91 22 6620 3141
abneesh.roy@edelcap.com
challenges like political upheavals (Telangana), reduced discretionary spending, wafer-

thin margins, unavailability of trained staff and funding issues. HarshMehta
+91 22 4063 5543
Toppicks harsh.mehta@edelcap.com

Titan, Shoppers Stop

October 3, 2011

Edelweiss Research is also available on www.edelresearch.com, Edelweiss Securities Limited

1
Bloomberg EDEL <GO>, Thomson First Call, Reuters and Factset.
 Retail
"Pleasedon'taskmeforatimeline
forRetailFDI,butweare
proceedingveryfast.It'scertainly
notonthebackburner."
IndustrySecretaryR.P.Singh
"Therewouldbemanifoldincrease
ininvestment(byus)ifFDIinmulti
brandretailisopenedup,"
WalMartIndiaPresident,RajJain
WebelieveFDIisgoingtobea
gamechangerforIndiaandwe
welcomeFDI.FDIboughtinthe
rightformat,withtherightchecks
and balanceswillhelpthecountrys
economytogrowfasterandfaster
-GovindShrikhande,MD,
ShoppersStop
HighlightsfromIndiaRetailForumandourttettewithindustry
Indianretailenjoysimmenseprospects
As per a recent survey by CB Richard Ellis, India was the topmost country which attracted
most of the new retailers while with eight new entrants in 2010, New Delhi became the
fourth most popular city for new retailers. Global economic downturn has made India more
lucrative from the retail view point for its good growth prospects and least possible impact
from austerity measures. As more retail companies vie for space, availability of fresh quality
real estate space will become scarcer. Pantaloon with existing 15.24mn sq ft operational
space and pipeline of 9mn sq ft incremental space is well placed.
FDI in multi-brand retail is likely to pace up the growth in retail but due to the sovereign debt
crisis in the US and Europe, foreign investors seem to traveling through a rough patch - may
not be too eager to enter big projects at the moment.
RetailersawaitFDIwithbatedbreath
Modern retail sector has an investment turnover ratio of 1.6x-2x and requires huge
investment to fuel growth. Domestic investors having a shorter horizon have limited capacity
to infuse funds which already comes at a high cost hence the impetus must come from
foreign partners (who hold a long term horizon of 15-20 years) which would then help
improve front-end as well as back-end facilities besides technology upgradation. This is likely
to be a win-win game as all players from the farm gate to retailer to consumer will benefit
from better remuneration to farmers, attractive margins for retailers and affordable prices
for consumers.
Chart1:Indicativepricebuiltup
9.0 8.30
7.2 0.61
0.46
0.46
(Unit price)
0.08 0.3
5.4 0.48
4.40
3.6
1.8
0.0
Price to consumer
Overall transit cost
Channel costs
Market yard cess
Processor margin
cost of collection
Processor value
Farm gate price
addition
centre
Source:E&Y,Edelweissresearch
FDI should have a positive impact on food inflation on account of the reduction in supply
chain. Overall GDP of the country will benefit from inflows of foreign capital as was seen in
China where post FDI, exports grew aiding the GDP growth. FDI implementation is also likely
to improve productivity and create job opportunities (employment in China doubled and
quadrupled in Thailand post FDI). However, on the back of low political interest, FDI in multi-
brand retail has taken a backseat but the benefit of permitting 100% FDI in cash and carry
model is likely to surface in the near term. Modern retail contributes ~8% to FMCG sector
and is expected to grow rapidly if FDI in multi-brand retail is permitted.
2 Edelweiss Securities Limited
 Retail

The Department of Industrial Policy and Promotion (DIPP) recently relaxed the definition of
group companies for cash and carry model which would enable the back-end foreign
partner to sell 100% products through the front-end retail partner (earlier the foreign partner
could sell only 25% of their turnover). This relaxation is likely to benefit the existing joint
ventures namely, Bharti-Wal Mart and Tata-Tesco. However, this does not address the
scarcity of funds for front end expansion likely to be critical for Pantaloons.

GST:Abiggergamechanger
The introduction of GST will eliminate various taxes charged by states and Central
governments, bringing all players on a level-playing field as small retailers will lose the
differential tax advantage over organized retailers. Consequently, retailers (including FMCG
players like HUL and GCPL) are more enthused with the implementation of GST than FDI
entry (which is on the backburner, riddled with riders). However, some state governments
are not in favor of GST as they view it as a step towards reduced financial autonomy.

Retailersbankonincreasingpenetrationlevels,targetsmallercities
Big retail players are on an expansion spree to exploit the potential growth. This is evident
from the fact that Future Group, Shoppers Stop and Reliance Retail have together picked up
~10mn sq feet of retail space recently. Prime space availability is indispensable so as to
increase penetration levels.

Table1:Retailersonanexpansionspree
Company Outletsinpipeline
Shopper's Stop 24
Lifestyle 25
Pantaloons 55
Bharti Group 20
Tanishq 15
Marks and Spencer 10
McDonalds 30
Hamleys 20
Mango 6
Source:Company,Edelweissresearch

In order to sustain the growth momentum, it is inevitable to tap the untapped market.
Instead of relying solely on existing customers, retailers are now looking to expand the
customer base by entering tier II and III cities. The consumer here is becoming increasingly
WorldsFirstGoldJewelleryCar like his tier I counterpart less keen on price tag and willing to try out new products.
helpscreatebuzzaroundGoldplus Retailers like Titan, Shoppers Stop, Aditya Birla Retail, GAS Jeans and Provogue have realized
massmarketfranchiseofTitan the potential in these cities and are looking to expand in these areas. Almost 70% of new mall
space is likely to come up in non-metros though it should be kept in mind that the psychology
and taste of this customer will be different and he will require more help on the shop floor
and more education of products. Infrastructure will also be a hitch making accessibility a
challenge for retailers.

According to the World Gold Council, rural and semi-urban markets make up 60% of Indias
gold jewellery market, but branded jewellery accounts for only ~ 7% of this market. Given the
humungous opportunity in small towns and rural India, Titan is focusing on its mass market
franchise Goldplus. It has launched a lower priced product using diamantine (a low cost
diamond substitute) especially for the rural market. Also to energize customer interest in

3 Edelweiss Securities Limited

 Retail

Goldplus, Titan plans to showcase Worlds First Gold Jewellery Car in 29 Goldplus outlets
over the next five months.

Onlineretailgainingincreasingacceptancethoughqualityneedstoimprove
InIndia,wecannotcatertothe
While e-commerce constitutes ~4% of the total retail industry in India, it plays a more
growingconsumerclassunlesswe
significant role in prompting purchases. While the ads may induce interest in an individual, he
godigital,giventhecostand
only becomes a customer after he gets details of the product online, compares with
logisticalchallengesofphysical
competitive offerings, takes opinion from current users and then decides to buy. For the
presenceandthesizeofour
urban consumer, four-walls is no longer the shop, the site itself is the shop which comes with
country
advantages of convenience and time-saving. Online retail is seen as a basic minimum
MrKashyapDeorah,President,
requirement for a modern, cross border retailer. To do well in e-retailing, it becomes more
FutureBazaar.com
important for the retailer to infuse confidence in consumer.

Indian consumer is said to be defined by ABCD Astrology, Bollywood, Cricket and Discounts.
The retailer is increasingly understanding this psyche of the consumer as is evident from the
propositions of sites like Snapdeal.com , Yebhi.com, timtara.com, and DealsandYou.com
(banking on discounts) and increasing presence of celebrities in ads and promotions of new
products. Operating online enables the retailers to provide extra discounts as it eliminates
the cost of maintenance of high levels of inventory and rentals.

Often retailers use the online platform to test the market before committing to physical
stores. It helps retailers to gauge the taste and preference of the new customer. However,
retailers with a physical store presence in the country are more likely to have a transactional
capability.

Timetoconvertwindowshopperstocustomerswithvalueproposition
Amid this enormous potential comes the challenge gratifying an affluent, attentive and
adamant Indian consumer. The Indian demographic is rapidly skewing towards a more
productive age group with 52% of the population being below the age of 30 years. This target
audience with a high disposable income is less conservative in spending, more receptive to
global thinking and open to spend more to enjoy convenience. Consumers no longer accept
basic products as they are quite vocal about their likes and want what is globally available
value added product coupled with good after sales service. We therefore believe that Indian
retailers need to energize their enthusiasm to convert these footfalls to purchases which can
with some effort be made brand loyal customers. For instance Shoppers Stops loyalty
program (first citizen members contributing 72% to Shoppers Stop revenue) has been a major
success.

The retailers can also target the mass segment with low-priced offerings, helping them to
increase volume sales. Since these consumers are more price sensitive, they are also open to
some compromise on quality. Having realized the potential of this segment, several apparel
brands (Marks & Spencer, ITC Wills Lifestyle) have introduced blended (cotton blended with
man-made fibers like polyester) low cost options. These customers, at a later point in time,
can be converted to brand loyal customers.

4 Edelweiss Securities Limited

 Retail

Challengesgalore
Reduced discretionary spends: Inflationary pressure has weighed heavily on consumer
spending with discretionary spend seeing a downtrend in the recent past. Private
consumption growth slipped from 8% in Q4FY11 to 6.3% in Q1FY12; consumer durables
industry grew at a meager 4.2% between April and July this year as compared to 18.5%
growth in the same period last year. Despite the inherent attraction to gold by Indian
consumers, gold jewellery sales in the month of August were muted (on account of sky
high prices). The stock market, the leading indicator of consumer sentiments, continues
to follow the bearish track. The upcoming festive season is likely to see enthused
spending but whether the growth story is sustainable will only be confirmed post
October when the festive season ends.

Chart2:SSSgrowthinShoppersStopsdepartmentstoresslows Chart3:SSSgrowthinHomeretail(PRIL)declinessharply
25.0 66.0
Rising inflationary
Rising inflationary pressure;
pressure;
19.0 slowdown in overall global 44.0 Lehman crisis;
slowdown in
economy economic overall global
Lehman crisis; slowdown in India
13.0 22.0 economy
economic slowdown in
(%)

(%)
India
7.0 0.0

1.0 (22.0)

(5.0) (44.0) Q1FY09

Q2FY09
Q3FY09
Q4FY09
Q1FY10
Q2FY10
Q3FY10

Q1FY11
Q2FY11
Q3FY11
Q4FY11
Q4 FY10
Q1FY09
Q2FY09
Q3FY09
Q4FY09
Q1FY10
Q2FY10
Q3FY10
Q4FY10
Q1FY11
Q2FY11
Q3FY11
Q4FY11
Q1FY12

Source:Company,Edelweissresearch

Wafer-thin margins: Despite the huge size of the retail market, players are finding it difficult
to earn profits. Except segments like apparel, players drive a low-cost strategy, working at
significantly lower margins compared to their foreign peers. With differentiation being very
low, discount is more often used as a tool to entice the customer.

Trained staff: The shopper now makes choices not just based on the product but on the
entire shopping experience. This makes it essential for retailers to have a well trained
staff. Front-end staff at most retail stores fails to meet consumer expectations and
having realized this, industry veterans like B.S.Nagesh has initiated training programmes
for front-end retail staff.

Struggle for prime retail space: The retail expansion race - intensified in the recent past -
has high demand and low supply of quality space. This is also creating a hitch for
international players to enter the Indian market. To add to the woes of retailers, as per a
recent order by the Delhi High Court (similar orders were earlier passed by high courts of
Punjab and Haryana, Karnataka, Orissa and Bombay as well), service tax (~10.3%) will be
levied on rentals (with a retrospective effect from 2007). The huge impact of this is
evident from the fact that Shoppers Stop would be liable to pay ~INR 170mn.

Political instability: Delayed decision making on the part of government has played the
role of a speed breaker for growth in retail sector. For instance, the current unrest in

5 Edelweiss Securities Limited

 Retail

Itisourtasktogoaboutitina
manner,inwhichthenationenjoys
thebenefitsofmoreFDIinretail
trade,withouthurtingourdomestic
interests.Icanassurethatwewill
donothingwhichwillhurtthe
essentialinterestsofthesmall
Indiantradecommunity
PrimeMinisterManmohanSingh
Hyderabad (over Telangana issue) is impacting sales of retailers as activities in city have
come to a halt.
Unemployment-A key concern: One of the main grounds on which FDI in multi-brand
retail is being opposed is the fear that it will lead to unemployment for small retailers,
traders and kirana stores. However, historic data shows that with FDI implementation,
employment increased two folds in China and four folds in Thailand.
Franchise model may repel FDI: Policies of the state make it imperative for foreign
players to operate through a franchise model (except in cash and carry). In a global
retailer survey by CB Richard Ellis, it was found that 35% of luxury and business fashion
retailers and 28% of homeware and department stores showed preference to operate
their own store over the franchise model. However, most retailers agreed that operating
through a franchise helps to test new markets, spread risk associated with aggressive
expansion and achieve substantial market penetration.

Recognizingeffortsofretailers
The retail players have done well even in the high inflationary environment which has led to a
significant decrease in discretionary spends. The industry has rewarded the efforts of players
at various retail forums, namely- the number of listed players being awarded at the 8th annual
Images Retail Awards (IRA) on 23rd September, 2011 at Mumbai; and Shoppers Stop being
awarded the ''BEST SUPPLY CHAIN EXCELLENCE AWARD'' in the Retail vertical during the 5th
Express, Logistics and Supply Chain Conclave, conducted by ELSC (Express Logistics and
Supply Chain) at Mumbai.

Table2:AnnualImagesRetailAwardsatIndiaRetailForumMumbai
AwardCategory Winner
Most Admired Retailer of the Year: Department Store LIFESTYLE
Most Admired Retail Launch of the Year HAMLEYS
Most Admired Retailer of the Year: Home Products HOME TOWN
Most Admired Retail Professional of the Year BHASKAR BHAT, MD,
TITAN INDUSTRIES
Most Admired Retailer of the Year: Luxury TANISHQ
Source:Company,Edelweissresearch

Outlook
The quarter, Q2FY12 is likely to be a soft one for the retail sector looking at the high inflationary
environment and sky high commodity prices. However, we believe discretionary spending
would pick up in the coming festive season. Yet, the true picture of growth in the sector will be
apparent post-October when festive season ends. The relaxation of norms in the cash and carry
model is a positive move. Similar promptness in FDI in multi-brand retail and GST
implementation will go a long way. Titan and Shoppers Stop are our top picks in the retail space.

Table3:Valuationsummary
Div
Company Market 52WH/L Mcap DilutedEPS(INR) P/E(x) EV/EBITDA(x) ROE(%) CAGR(%)
yield(%)
Price(INR) (USDMn) FY11 FY12E FY13E FY11 FY12E FY13E FY11 FY12E FY13E FY11 FY12E FY13E FY13E FY1113E
Retail
Pantaloon Retail 198 528 / 196 889 9.4 11.4 15.8 20.9 17.3 12.5 8.2 7.4 6.4 6.4 7.3 9.4 1.0 29.4
Shoppers' Stop 350 505 / 261 589 5.4 9.5 13.5 64.6 37.0 25.9 22.4 18.8 12.9 11.9 15.7 18.9 NA 58.1
Titan Industries 209 238 / 140 3788 4.9 6.4 8.3 42.8 32.7 25.3 29.6 22.1 16.9 49.0 46.0 43.4 1.2 30.2
RetailMean 42.8x 29.0x 21.2x 20.1x 16.1x 12.1x 22.4 23.0 23.9 1.1 39.2
Source:company,Edelweissresearch

6 Edelweiss Securities Limited

 Retail

EdelweissSecuritiesLimited,Edelweiss House, off C.S.T. Road, Kalina, Mumbai 400 098.

Board: (91-22) 4009 4400,Email:research@edelcap.com

VikasKhemani Head Institutional Equities vikas.khemani@edelcap.com +91 22 2286 4206

Nischal Maheshwari Head Research nischal.maheshwari@edelcap.com +91 22 6623 3411

Coveragegroup(s)ofstocksbyprimaryanalyst(s):Retail
Pantaloon Retail, Shoppers Stop, S Kumars Nationwide, Titan Industries


RecentResearch
Date Company Title Price (INR) Recos

20-Sep-11 Titan Rural mural: Toeing the FMCG 222 Buy
1,150 Industries line; EdelFlash

950
29-Aug-11 Titan Gold is gold, reassures our 206 Buy
Buy
750 Industries Survey;
(INR)

550 CompanyUpdate
29-Aug-11 Buy
Pantaloon Long-term bet; 281 Buy
350 Buy
Retail ResultUpdate
150
Aug-08
Sep-08

Nov-08
Dec-08
Oct-08

Jan-09

Jun-09
Jul-08

Jul-09
Feb-09

May-09
Mar-09
Apr-09

DistributionofRatings/MarketCap
EdelweissResearchCoverageUniverse RatingInterpretation
Buy Hold Reduce Total
Rating Expected to

Rating Distribution* 119 47 15 184
Buy appreciate more than 15% over a 12-month period
* 2 stocks under review
Hold appreciate up to 15% over a 12-month period
> 50bn Between 10bn and 50 bn < 10bn
Reduce depreciate more than 5% over a 12-month period
Market Cap (INR) 111 57 16

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