Result Update

May 20, 2010

Rating matrix
Rating : Strong Buy Koutons Retail India (KOURET)
Target : Rs 384
Target Period : 12-15 months Rs 309
Potential Upside : 24 %
WHAT’S CHANGED…
Financial Performance (Rs Crore)
PRICE TARGET ............................................................. Changed from Rs 505 to Rs 384
FY09 FY10 FY11E FY12E
EPS (FY11E) ............................................................... Changed from Rs 39.5 to Rs 33.6
Net Sales 1046.7 1205.4 1363.8 1540.9
EPS (FY12E) ............................................................... Changed from Rs 51.1 to Rs 38.4
EBITDA 208.2 234.1 269.5 311.9
Net Profit 79.6 82.3 102.8 117.3 RATING.......................................................................................................... Unchanged

Dismal performance…
Valuation summary
Koutons Retail India reported a dismal performance in Q4FY10, far
FY09 FY10E FY11E FY12E
below our and the Street expectations. The company reported net sales
PE (x) 11.9 11.5 9.2 8.0 of Rs 386 crore against our expectation of Rs 460.9 crore. This translates
Target PE (x) 14.7 14.2 11.4 10.0 into a meagre 1.9% growth YoY. The EBITDA margin was at 19.4%
EV to EBITDA (x) 7.4 6.0 5.3 4.9 against 25% in Q4FY10, a steep contraction of 560 bps YoY. This was
mainly driven by lower average realisation per sq ft and higher
Price to book (x) 2.2 1.9 1.6 1.3
discounts offered to push sales. Net profit including prior period
RoNW (%) 20.5 17.7 18.6 17.8 expenses (Rs 1.2 crore) declined by 12.2% YoY with net margin of 8.1%
RoCE (%) 23.1 20.5 21.1 21.3 against 9.5% in the corresponding quarter of the previous year.
ƒ Retail space declines marginally QoQ but rises 7% YoY
Stock data The retail space at the end of the quarter stood at 13.6 lakh sq ft with
Market Capitalisation Rs 962 crore 95.3% of stores on a franchise basis. The company operates 1,307
Debt (FY10) Rs 581.8 crore
stores with 702 stores under Koutons (including 15 racks stores) and
605 stores under Charlie Outlaw.
Cash (FY10) Rs 41 crore
EV Rs 1503 crore ƒ Thrust on better profitability
52 week H/L 509/308 The company has taken initiatives to improve the profitability by
Equity capital Rs 30.6 crore better inventory management, debt restructuring (average cost of
Face value capital now between 13-14%), introducing family stores that yield
10.0
better profitability and focus on better margin products. Koutons is
MF Holding (%) 0.4
looking at reducing its discounts to improve profitability.
FII Holding (%) 14.5
Valuation
Price movement (Stock vs. Nifty) We are positive on the business model of Koutons Retail wherein 95.3%
of stores are on a franchise model. The refinancing of debt would be a
460 5500 positive for the earnings of the company. The initiatives taken to improve
440 5000
efficiency and profitability would bear fruit in the near term performance
420 4500
of the company. At the CMP of Rs 309 per share, the stock is trading at a
400 P/E of 9.2x and 8x its FY11E and FY12E earnings of Rs 33.6 and Rs 38.4,
4000
380 respectively. We are maintaining our STRONG BUY rating on the stock
3500
360 with a downward revised target price of Rs 384 valuing the stock at 10x
340 3000
its FY12E earnings.
320 2500
300 2000
Nov-09
Sep-09
May-09

Jul-09

Jan-10

Mar-10

May-10

Exhibit 1: Valuation Metrics

(Rs Crore) Q4 FY10 Q4 FY10E Q4 FY09 Q3 FY10 YOY (%Chg) QoQ (%Chg)
Koutons (LHS) NIFTY Net Sales 386.0 460.9 378.9 269.8 1.9 43.1
EBITDA 74.8 90.7 94.7 49.2 (21.0) 52.0
Analyst’s name EBITDA Margin (%) 19.4 19.7 25.0 18.3 (560 bps) 113 bps
Bharat Chhoda Depreciation 4.8 6.0 5.2 3.9 (7.9) 23.0
bharat.chhoda@icicisecurities.com Interest 20.4 21.7 35.5 21.5 (42.6) (5.2)
Prerna Jhunjhunwala Reported PAT 31.4 39.8 35.8 15.8 (12.2) 99.1
prerna.jhunjhunwala@icicisecurities.com EPS (Rs) 10.3 13.0 11.7 5.2 (12.2) 99.1
Jehangir Master Source: Company, ICICIdirect.com Research
jehangir.master@icicisecurities.com

ICICIdirect.com | Equity Research

Koutons Retail (KOURET)

Space addition of 7% YoY during the quarter

Koutons Retail added 68 new family stores during the year. It closed 57
stores during the quarter. At the end of FY10, it operates 1,307 stores of
which 702 stores belong to the Koutons format while the remaining 605
are under the “Charlie Outlaw” format. The total area under operations
increased to 13.6 lakh sq ft at the end of the quarter from 12.67 lakh sq ft
at the end of Q4FY09, a growth of 7%. For the full year, the company was
in a consolidation phase, wherein it increased the space while reducing
the number of stores simultaneously.
Area under operation increased to 13.6 lakh sq ft from
Exhibit 2: Area under operations at 13.6 lakh sq ft
12.67 lakh sq ft at the end FY09, growth of 7%
14

12 4.07 3.99 3.87

3.88 3.90 3.99
10 3.77
3.49
Lakh Sq.ft. .

6
8.89 8.93 9.63 9.74 9.70
4 8.28 8.77
6.95
2

0
Q1 FY09 Q2 FY09 Q3 FY09 Q4 FY09 Q1 FY10 Q2 FY10 Q3 FY10 Q4 FY10
Koutons                   Charlie                  

Source: Company, ICICIdirect.com Research

Added 68 family stores in FY10 Exhibit 3: Total 1307 stores operational at the end of FY10
1500

1300

1100 640 650 649 655

647 636
599 605
900
No. of Stores .

700

500
686 758 774 751 727 733 724 702
300

100

-100
Q1 FY09 Q2 FY09 Q3 FY09 Q4 FY09 Q1 FY10 Q2 FY10 Q3 FY10 Q4 FY10
Koutons Charlie

Source: Company, ICICIdirect.com Research

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Koutons Retail (KOURET)

Exhibit 4: Average realisation declines by 4.6% YoY

4500
4279.9
4000
3500
3000 2967.8 2828.8

Rs per sq ft
2500 2510.7 2614.2
2000 1947.9 1967.2
1500 1642.6 1576.8
1000
500
0
4Q FY08 Q1 FY09 Q2 FY09 Q3 FY09 Q4 FY09 Q1 FY10 Q2 FY10 Q3 FY10 Q4 FY10

Source: Company, ICICIdirect.com Research

Exhibit 5: Total 95.3% of stores operated on franchise agreements

1500

1250

1000
No. of Stores .

1167 1181 1156 1128 1143 1107

750 1060 1060

500

250
135 145 146 147 145 144 175 185
0 90 86 97 97 101 101 78 62
1Q FY09 2Q FY09 Q3 FY09 Q4 FY09 Q1 FY10 Q2 FY10 Q3 FY10 Q4 FY10
COCO COFO FOFO

Source: Company, ICICIdirect.com Research

Revising estimates
We have revised our estimates downwards on account of dismal results
for the quarter as well as FY10. The company has been closing unviable
stores and converting existing stores into family stores. According to the
management, the company is looking at better profitability due to the
following initiatives taken:
1. Better inventory management
2. Lower cost of debt on account of debt rescheduling
3. Larger number of family stores, which yield better profitability
compared to standalone stores
4. Marginally lower discounts to be offered to improve margins
5. Sales of better margin products like footwear, womenswear and
kidswear to rise
As a result, better-than-expected results would act as a trigger to revise
our estimates upwards. Our revised space assumptions now stand at 1.4
mn sq ft for FY11E and 1.48 mn sq ft for FY12E. Our revised sales
estimate stands at Rs 1,363.8 crore for FY11E and Rs 1,540.9 crore in
FY12E with net profit of Rs 102.8 crore for FY11E and Rs 117.3 crore for
FY12E.

ICICIdirect.com | Equity Research

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Koutons Retail (KOURET)

Exhibit 6: Revised estimates

FY11E FY12E
Particulars Earlier Revised % Chg Earlier Revised % Chg
Space (Mn Sq Ft) 1.52 1.40 -8.2 1.66 1.48 -10.8
Sales 1539.3 1363.8 -11.4 1854.9 1540.9 -16.9
Operating Profit 308.9 269.5 -12.8 385.0 311.9 -19.0
Margin (%) 20.1 19.8 20.8 20.2
Net Profit 120.6 102.8 -14.8 156.0 117.3 -24.8
Margin (%) 7.8 7.5 8.4 7.6
EPS 39.5 33.6 -14.8 51.1 38.4 -24.8
Source: Company, ICICIdirect.com Research

Valuations
We are positive on the business model of Koutons Retail wherein 95.3%
of stores are on a franchise model. The refinancing of debt would be a
positive for the earnings of the company. The initiatives taken to improve
efficiency and profitability would bear fruit in the near term performance
of the company. At the CMP of Rs 309 per share, the stock is trading at a
P/E of 9.2x and 8x its FY11E and FY12E earnings of Rs 33.6 and Rs 38.4,
respectively. We are maintaining our STRONG BUY rating on the stock
with a downward revised target price of Rs 384 valuing the stock at 10x
its FY12E earnings.
Exhibit 7: One-year forward PE chart
1200

1000 30x

800 25x
Rs per share .

20x
600
15x
400

200 10x

0
Jan-08

Jan-09

Jan-10
Nov-07

May-08

Jul-08

Nov-08

May-09

Jul-09

Nov-09

May-10
Mar-08

Sep-08

Mar-09

Sep-09

Mar-10
Source: ICICIdirect.com Research

ICICIdirect.com | Equity Research

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 Koutons Retail (KOURET)

ICICIdirect.com Universe

Koutons Retail Sales(Rs.Cr) EPS (Rs.) PE (x) EV/EBITDA (x) RoNW (%) RoCE (%)
Idirect Code KOURET CMP (Rs.) 309 FY09 1046.7 26.0 11.9 7.4 20.5 23.1
Target (Rs.) 384 FY10E 1205.4 26.9 11.5 6.0 17.7 20.5
FY11E 1363.8 33.6 9.2 5.3 18.6 21.1
MCap 944.0 Upside (%) 24 FY12E 1540.9 38.4 8.0 4.9 17.8 21.3
Pantaloon Retail Sales(Rs.Cr) EPS (Rs.) PE (x) EV/EBITDA (x) RoNW (%) RoCE (%)
Idirect Code PANRET CMP (Rs.) 396 FY09 6341.7 8.1 49.1 14.4 6.8 11.7
Target (Rs.) 451 FY10E 7890.2 14.3 27.8 12.4 10.4 12.0
FY11E 10006.1 14.6 27.2 10.3 9.1 13.1
MCap 7532.8 Upside (%) 14 FY12E 12473.6 19.1 20.7 8.8 10.7 14.3
Vishal Retail Sales(Rs.Cr) EPS (Rs.) PE (x) EV/EBITDA (x) RoNW (%) RoCE (%)
Idirect Code VISRET CMP (Rs.) 50 FY09 1323.2 - - - - -
Target (Rs.) - FY10E - - - - - -
MCap 112.0 Upside (%) NA FY11E - - - - - -

ICICIdirect.com | Equity Research

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 Koutons Retail (KOURET)

RATING RATIONALE
ICICIdirect.com endeavours to provide objective opinions and recommendations. ICICIdirect.com assigns
ratings to its stocks according to their notional target price vs. current market price and then categorises them
as Strong Buy, Buy, Add, Reduce, and Sell. The performance horizon is two years unless specified and the
notional target price is defined as the analysts' valuation for a stock.

Strong Buy: 20% or more;

Buy: Between 10% and 20%;
Add: Up to 10%;
Reduce: Up to -10%
Sell: -10% or more;

Pankaj Pandey Head – Research pankaj.pandey@icicisecurities.com

ICICIdirect.com Research Desk,

ICICI Securities Limited,
7th Floor, Akruti Centre Point,
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Mumbai – 400 093

research@icicidirect.com

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