Shoppers Stop Result Update Jul 08 EDEL

8/14/2019 Shoppers Stop Result Update Jul 08 EDEL

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Results well below expectations; visible signs of slowdow n

Shoppers Stop (SSL) reported extremely poor Q1FY09 numbers with net retailrevenues of INR 2.9 bn (up 28% Y-o-Y) and net losses of INR 213 mn against a profitof INR 20 mn in Q1FY08, much lower than our expectations. Revenue growth hasmainly come from price increases, with both average selling price and transaction sizeincreasing 12% Y-o-Y each and a 5% decline in volumes in like-to-like stores.

Severe cost pressures impact margins; one time brand spend of I NR 112 mn

Severe cost pressures have impacted margins and SSL has reported losses of INR 71mn at the EBITDA level against a gain of INR 138mn in the previous year. Alloperating cost heads have contributed to this margin erosion, with total operatingexpenses accounting for 97.6% of revenues against 87.3% in Q1FY08. Selling costsincluded a one-time spend of INR 112 mn on brand logo and campaigns, but even

after adjusting for the same, total operating expenses amounted to 94.3% of revenues.

Slowdow n in consumption to hit SSL

We had pointed out in our retail sector note, A bumpy ride ahead dated July 2 thatwe expect large value-focused retailers to fare better than lifestyle-focused playerslike SSL in times of rising inflation and consumption slowdown. The continued rolloutdelays, unabated margin pressures, slowing down of same store sales growth, andgrowing macro concerns that could slow down consumption, make the next 12-18months very difficult for SSL. Additionally, given that some of the new ventures anddepartment stores are yet to turn profitable, the pressure on growth and margins willcontinue.

Outlook and Valuations: Bleak outlook; downgrade to SELL

In view of the deteriorating growth outlook, we have downgraded our estimates andour recommendation to SELL . We have increased the discount rate in our DCF modelfrom 11.5% to 14% to account for higher cost of debt and equity. Our revised valuefor SSL stands at INR 8.7 bn, which translates into INR 251/share against INR432/share earlier. The stock currently trades at an EV/sales multiple of 0.8x FY09Eand 0.6x FY10E revenues and an earnings multiple of 86.3x FY10E EPS of INR 3.5.

Priya Ayyar

+91-22-4063 5413

[email protected]

Reuters : SHOP.BO

Bloomberg : SHOP IN

52-week range (INR) : 628 / 272

Share in issue (mn) : 34.9

M cap (INR bn/USD mn) : 10.5 / 246.3

Avg. Daily Vol. BSE/NSE (000) : 9.5

Promoters : 66.1

MFs, FIs & Banks : 8.1

FIIs : 14.8

Others : 11.0

Sensex Stock Stock overSensex

1 month 2.5 (14.1) (16.6)

3 months (20.2) (26.0) (5.8)

12 months (9.6) (46.8) (37.2

India Equity Research | Retail Result Update

SHOPP ERS STOP INR 300 U n a b a t e d m a rg i n p r e s su r e s SELL July 30, 2008

Market Data

Share Holding Pattern (%)

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Relative P erformance (% )

Financials

Year to March Q1FY09 Q1FY08 change Q4FY08 change FY08 FY09E

Revenues (INR mn) 2,944 2,303 27.8 3,143 (6.4) 11,651 14,515

EBITDA (INR mn) (88) 126 (169.9) 137 (164.2) 550 682

Net profit (INR mn) (231) 8 NA (4) NA 26 (182)

Diluted EPS (INR) (6.6) 0.2 (0.1) 0.8 (5.2)

Diluted P/E (x) 396.1 NA

EV/EBITDA (x) 22.5 18.2

ROAE (%) (6.7)


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Edelweiss Securities Limited

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Key highlights

Same store sales growth for the company in the quarter stood at 8.9%, down from 13%in Q1FY08. For the department store format, growth stood at 7% with stores older thanfive years growing at only 1%.

Share of private labels declined marginally to 20.4% from 21% in the previous year.

Shrinkage for the quarter stood at 0.62% against 0.26% in Q1FY08. Shrinkage has been

on the rise in the past two quarters, which is a cause of concern.

Among the new initiatives, Crossword, M.A.C., and Clinique have turned EBITDA-positive.This has led to lower EBITDA losses of INR 27.9 mn, against a loss of INR 139 mn inQ4FY08.

Operating metrics like GMROF and GMROL have shown an improvement of 7% and 8%,respectively, despite margin pressures. However, some inventory pile up has led to a 9%decline in GMROI.

We have downgraded our revenue estimates by 6% for FY09E from INR 15.3 bn to INR14.5 bn, EBITDA estimates by 26% from INR 919 mn to INR 682 mn and reduced thenet profit of INR 125 mn to a net loss of INR 182mn. For FY10E we have reduced ourrevenue estimates by 19% from INR 22.8 bn to INR 18.7 bn, EBITDA estimates by 20%

from INR 1.5 bn to INR 1.2 bn and net profit estimates form INR 265 mn to INR 121 mn.The revised EPS for FY10E stands at INR 3.5.


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Financial snapshot (INR mn)Year to March Q1FY09 Q1FY08 % ch a n ge Q4FY08 % c ha n ge FY08 FY09E FY10ETotal revenue 2,944 2,303 27.8 3,143 (6.4) 11,651 14,515 18,777

Raw materials 1,858 1,447 28.3 2,077 (10.6) 7,503 9,381 12,038 Employee costs 243 188 28.9 189 28.4 809 1,111 1,404 SGA expenses 932 541 72.3 740 25.9 2,789 3,341 4,097

EBITDA (88) 126 (169.9) 137 (164.2) 550 682 1,239

Interest 53 12 354.1 32 69.1 131 354 507 Depreciation 150 93 60.6 117 27.9 435 481 576 Other income 18 5 259.4 5 246.9 88 51 61

PBT (273) 26 (1,139.3) (6) 4,486.8 72 (102) 217 Provisions for taxation (12) 19 (165.3) 20 (161.9) 79 80 96

Net profit (261) 8 NA (26) NA (7) (182) 121 Minority interest 30 - 22 33 - -

Reported profit (231) 8 NA (4) 5,836 26 (182) 121 Equity capital (FV INR 10) 349 348 350 349 348 348 No. of shares (mn) 35 35 35 35 35 35 Diluted EPS (INR) (6.6) 0.2 (0.1) 0.8 (5.2) 3.5 Diluted P/E (x) 396.1 NA 86.3 EV/EBITDA (x) 22.5 18.2 10.0

As % of net revenuesPurchases 63.1 62.9 66.1 64.4 64.6 64.1 Employee costs 8.2 8.2 6.0 6.9 7.7 7.5 SGA expenses 31.7 23.5 23.5 23.9 23.0 21.8 EBITDA (3.0) 5.5 4.4 4.7 4.7 6.6 Net profit (7.8) 0.3 (0.1) 0.2 (1.3) 0.6


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Company Description

SS L, part of the K Raheja Group of Companies , is a focused luxury segment departmentstore player. It has presence in high opportunity segments like home improvement throughHome Stop ; infant and mothers to be care through Mother care (a franchise with MothercarePLC) ; cosmetics and beauty care through M.A.C. and Clinique (a retail agreement with EsteeLauder) and Arcelia ; the books and music space through Crossword ; fast food through CafeBistro and Desi caf ; and in airport retailing through a JV with Nuance from Switzerland. It

also has the option to acquire 51% in HyperCity, a hypermarket venture promoted by agroup company, by December 31, 2008, at an agreed amount of cost +10% or market value,whichever is lower. SSL has already acquired 19% in HyperCity for INR 2 mn towards sharecapital. HyperCity has announced plans to set up 20 hypermarkets over the next three tofour years. The company operates 1.6 m n sq ft of space.

Investment Theme

The Indian retail landscape is evolving with interplay of several demographic and economicfactors. A strong 9% GDP growth, backed by changing consumer behaviour in favour of larger discretionary spend, has set the stage for a healthy 8.6% growth in the retail spaceover FY07-11E. The big opportunity lies in the growing share of organised retail with the

growing trend of consumers to allocate a larger share of income to consumption and gradualimprovement in lifestyle. We expect organised retail to grow at 42% CAGR, to reach USD 70bn by FY11E, accounting for 15% of total retail , against 4.1% currently.

SS L is a niche play with strong brand position in the lifestyle space. It has assiduouslypositioned itself as a retailer since 1991 of superior quality products and services, offering aninternational shopping experience. This strong positioning and brand recall gives thecompany a strategic advantage in the l ight of increasing competition. With its steadfast focuson systems and processes and its ability to attract global brands as venture partners , webelieve SSL is an attractive bet on the lifestyle retail evolving in the country.

Key Risks

Store rollout delays

A large number of retailers are facing delays in roll outs due to delays by developers. This isa significant risk and can lead to cost overruns. Additionally, delays can also lead to capitalcrunch with a large number of stores bunching up.

Pressure on margins d ue to cost escalation and competition

Escalation in lease rentals and administration expenses can impact margins. With increasingcompetition, catchment areas are shrinking and the PSFPAs are not scaling up as expected.

Slow dow n in same store sales

A large part of the growth of the growth for the company comes from growth in older stores.Any significant slowdown in this growth will be a risk to the companys growth.


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Financial Statements

Income statement (I NR mn)Year to March FY06 FY07 FY08 FY09E FY10ENet revenues 6,811 8,778 11,459 14,262 18,466 Other operating income 116 156 192 253 311 Total operating income 6,928 8,934 11,651 14,515 18,777

Cost of goods sold 4,617 5,882 7,503 9,381 12,038 Rent and Lease expenses 495 637 1,020 1,334 1,673 Employee expenses 436 600 809 1,111 1,404 SG&A expenses 892 1,131 1,769 2,006 2,424 Total expenditure 6,440 8,250 11,101 13,832 17,538 EBITDA 487 684 550 682 1,239 Depreciation 166 290 435 481 576 EBIT 322 394 115 202 663 Interest expenditure 28 50 131 354 507 Other income 78 127 88 51 61 Profit before tax 371 471 72 (102) 217 Provision for taxation 133 226 79 80 96 Minority interest 4 2 33 - - Profit after tax 243 247 26 (182) 121 Recurring net profit 243 247 26 (182) 121 EPS (INR) fully diluted 7.1 7.0 0.8 (5.2) 3.5 No. of shares 34 35 35 35 35 CEPS (INR) fully diluted 11.9 15.4 12.3 8.6 20.0 Dividend per share 1.5 1.5 1.5 1.5 1.5

Common size metrics- as % of net revenuesYear to March FY06 FY07 FY08 FY09E FY10ECost of goods sold 66.7 65.8 64.4 64.6 64.1 Rent and Lease expenss 7.1 7.1 8.8 9.2 8.9 Employee expenses 6.3 6.7 6.9 7.7 7.5

SG&A expenses 12.9 12.7 15.2 13.8 12.9 EBITDA margin 7.0 7.7 4.7 4.7 6.6 Depreciation 2.4 3.2 3.7 3.3 3.1 Interest expenditure 0.4 0.6 1.1 2.4 2.7 EBIT margin 4.6 4.4 1.0 1.4 3.5 Net profit margin 3.5 2.8 0.2 (1.3) 0.6

Growth metrics (%)Year to March FY06 FY07 FY08 FY09E FY10ENet revenues 30.8 28.9 30.5 24.5 29.5 EBITDA 41.8 40.4 (19.6) 24.0 81.6 EBIT 38.6 22.6 (70.9) 75.9 228.9

Net profit 28.2 1.9 (89.3) (791.1) 166.4 EPS 2.3 (1.0) (89.2) (791.1) 166.4


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Balance sheet (I NR mn)As on 31st March FY06 FY07 FY08 FY09E FY10EShare capital 344 348 349 348 348 Reserves 2,285 2,510 2,484 2,242 2,303 Shareholders funds 2,629 2,859 2,833 2,590 2,651 Long term debt 635 1,304 2,071 3,462 4,987 Deferred tax 4 41 17 17 17

Sources of funds 3,267 4,204 4,888 6,035 7,622 Gross assets 1,866 2,350 3,684 4,112 5,527 Less: depreciation 565 846 1,272 1,753 2,329 Net fixed assets 1,302 1,504 2,412 2,360 3,199 Capital WIP 87 228 355 930 930 Goodwill 96 109 132 132 132 Investments - 0 190 190 190 Current assets 2,733 3,767 3,989 4,510 5,796 Debtors 93 128 88 143 178 Cash & bank balance 1,138 1,015 136 485 622 Inventory 737 1,154 1,822 2,066 2,656 Advances 765 1,470 1,943 1,816 2,340 Current liabilities 950 1,405 2,190 2,086 2,624 Creditors 819 1,276 2,129 1,957 2,510 Other liabilities 72 67 - 67 53 Provisions 59 61 61 61 61 Working capital 1,783 2,362 1,799 2,424 3,172 Uses of funds 3,267 4,204 4,888 6,035 7,622 BV (INR) 76.5 82.1 81.3 74.4 76.1

Free cash flow (I NR mn)Year to March FY06 FY07 FY08 FY09E FY10ENet profit 243 247 26 (182) 121 Add: Depreciation 166 290 435 481 576 Gross cash flow 409 537 462 298 697

Less: Changes in W. C. (83) (703) (301) (277) (611) Operating cash flow 325 (165) 161 22 86 Less: Capex (335) (654) (1,677) (1,003) (1,415) Free cash flow (10) (819) (1,516) (981) (1,329)

Cash flow metricsYear to March FY06 FY07 FY08 FY09E FY10EOperating cash flow 325 (165) 161 22 86 Financing cash flow 1,069 611 580 975 959 Investing cash flow (278) (563) (1,620) (952) (1,354) NET CASH FLOW 1,117 (118) (879) 45 (309) Capex 335 654 1,677 1,003 1,415

Dividend paid (52) (52) (52) (52) (52)


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RatiosYear to March FY06 FY07 FY08 FY09E FY10EROAE (%) 13.7 9.0 0.9 (6.7) 4.6 ROACE (%) 12.5 10.6 2.5 3.7 9.7Debtor days 5 5 3 4 3Inventory days 38 46 55 51 50Fixed assets t/o (x) 6.1 6.4 6.0 6.1 6.8

Debt/Equity 0.2 0.5 0.7 1.3 1.9Interest coverage (x) 11.4 7.9 0.9 0.6 1.3Payable days 42 51 65 48 47Current ratio 2.9 2.7 1.8 2.2 2.2

Operating ratiosYear to March FY06 FY07 FY08 FY09E FY10ETotal asset turnover 2.0 1.8 1.8 1.9 2.0Fixed asset turnover 6.1 8.0 1.8 2.7 7.2Equity turnover 3.9 3.3 4.1 5.4 7.2

Valuations parametersYear to March FY06 FY07 FY08 FY09E FY10EEPS (diluted) (INR) 7.1 7.0 0.8 (5.2) 3.5Y-o-Y growth (%) 2.3 (1.0) (89.2) (791.1) 166.4CEPS (INR) 11.9 15.4 12.3 8.6 20.0Y-o-Y growth (%) 8.2 29.4 (20.0) (30.4) 133.8P/E ( x) 42.5 42.9 395.7 (57.3) 86.3EV/Sales (x) 1.4 1.2 1.0 0.8 0.6EV/EBITDA (x) 20.1 15.7 22.5 18.2 10.0P/BV (x) 3.9 3.7 3.7 4.0 3.9FCFPS (INR) (0.3) (23.5) (43.5) (28.2) (38.2)


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Naresh Kothari Co-Head Institutional Equities [email protected] +91 22 2286 4246

Vikas Khemani Co-Head Institutional Equities [email protected] +91 22 2286 4206

Shriram Iyer Head Research [email protected] +91 22 2286 4256

Co v e r a g e g r o u p ( s ) o f s t o ck s b y p r i m a r y a n a l y s t ( s ) : Reta i l : Pantaloon Retail & Shoppers Stop

Shoppers Stop Recent Research

Accm

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S e p - 0

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N o v - 0 7

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( I N R )

Rating Interpretation

Bu y appreciate more than 20% over a 12-month period

Accumulate appreciate up to 20% over a 12-month period

Reduce depreciate up to 10% over a 12-month period

Sell depreciate more than 10% over a 12-month period

02-Jul-08 Retail A bumpy ride ahead;Sector Update

29-Apr-08 Shoppers Rising costs, high 406 Accum.Stop depreciation impact

Margins; Result Update

26-Apr-08 Pantaloon Strong growth coupled478 BuyRetail with margin improvement;

Result Update

15-Feb-08 Retail Shopping goes hyper;Sector Report

Distribution of Ratings / Market Cap

Edelweiss Research Coverage Universe

Rating Distribution* 101 62 14 2 188

*8 stocks under review / 1 rating withheld

Market Cap (INR) 77 70 41

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> 50bn Between 10bn and 50 bn < 10bn

Date Company Title Price (INR) Recos

Rating Expected to

Buy Accum ulate Reduce Sell Total

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Shoppers Stop Result Update Jul 08 EDEL