SHOPPERS STOP -...

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Edelweiss Securities Limited

Shoppers Stop’s (SSL) Q2FY15 revenue came in line; PAT surpassed expectations. Key positives were: (i) sharp uptick in LTL sales growth, which surged at 11% YoY on high base of 15.5%; (ii) company level EBITDA breakeven in Hypercity for the first time (likelihood of PAT positive by FY16E); and (iii) 98bps YoY improvement in standalone EBITDA margin to 6.1%. Key negative was 6.7% YoY dip in consumer entry in LTL departmental stores. The company will be one of the key beneficiaries of recovery in urban consumption. Maintain ‘BUY’. LTL sales improved in both departmental stores and Hypercity SSL’s departmental stores reported strong LTL sales growth of 6.9%/20.2% YoY in mature/new stores in Q2FY15. LTL volume growth of 7.2% YoY was the second highest in past 10 quarters. Sales per sq ft at INR2,354 is at 15-quarter high. Conversion ratio at 23.7% is second highest in past 10 quarters. Hypercity’s LTL sales growth (ex-CDIT) improved to 4.0% YoY vis-à-vis a decline of 0.3% YoY in Q1FY15.

Q2FY15 conference call: Key takeaways The company expects 7-8% YoY LTL growth for departmental stores in Q3FY15. The slightly lower growth vis-à-vis Q2FY15 will be due to high competition from online retailers. Consumption should rise much faster in H1FY16 as actual on-ground recovery is expected to commence then; LTL sales growth can be in double digits in FY16. Management expects standalone EBITDA margin to be 6.0-6.5% in FY15E and 7.0-7.5% in FY16E. With gold prices correcting, investment in fine jewellery has plummeted. Hence, demand for fine jewellery will be subdued till gold prices stabilise. Of 15 Hypercity stores, 9 have achieved breakeven at the EBITDA level. Ad spends of private labels have been increased. Outlook and valuations: Cautious; maintain ‘BUY’ SSL continues to execute better than most peers with good sales performance and recovery in margins. At CMP, the stock is trading at 26.1x and 21.0x FY15E and FY16E EV/EBITDA, respectively. We maintain ‘BUY/SP’ with a target price of INR605.

RESULT UPDATE

SHOPPERS STOP Volume growth improves; Hypercity turns EBITDA positive

EDELWEISS 4D RATINGS

Absolute Rating BUY

Rating Relative to Sector Performer

Risk Rating Relative to Sector Low

Sector Relative to Market Overweight

MARKET DATA (R: SHOP.BO, B: SHOP IN)

CMP : INR 493

Target Price : INR 605

52-week range (INR) : 624 / 320

Share in issue (mn) : 83.3

M cap (INR bn/USD mn) : 41 / 668

Avg. Daily Vol.BSE/NSE(‘000) : 54.4

SHARE HOLDING PATTERN (%)

Current Q1FY15 Q4FY14

Promoters *

67.3 67.3 67.3

MF's, FI's & BK’s 14.9 14.9 15.1

FII's 2.9 2.9 2.8

Others 14.9 14.9 14.8 * Promoters pledged shares (% of share in issue)

: 21.8

PRICE PERFORMANCE (%)

Stock Nifty

EW Retail Index

1 month (0.5) 2.6 2.7

3 months 40.7 4.8 3.9

12 months 63.4 30.7 18.6

Abneesh Roy +91 22 6620 3141 [email protected] Pooja Lath +91 22 6620 3075 [email protected] Tanmay Sharma +91 22 4040 7586 [email protected]

India Equity Research| Retail

November 5, 2014

Financials (INR mn)Year to March Q2FY15 Q2FY14 % change Q1FY15 % change FY14 FY15E FY16E

Revenues 9,084 7,758 17.1 6,502 39.7 39,614 48,178 56,693

EBITDA (INR mn) 555 398 39.6 308 80.2 1,334 1,813 2,261

Net profit 159 99 60.4 8 2,017.9 (83) 180 358

Dil. EPS (INR) 1.9 1.2 60.0 0.1 2,017.9 (1.0) 2.2 4.3

EV/EBITDA (x) 35.3 26.1 21.0

EV/Sales (x) 1.2 1.0 0.8

ROAE (%) (1.4) 3.6 7.0

Quarterly numbers are standalone; Annual numbers are consolidated

Retail

2 Edelweiss Securities Limited

Q2FY15 concall | Key takeaways Demand in Q3FY15: Retail sales have been a bit soft in the festive season. There was a mixed growth pattern in Shoppers Stop and Hypercity. Growth was higher in Hypercity (above 8% YoY LTL growth; an improvement over Q2FY15), while for Shoppers Stop LTL growth was 7-8% YoY. The company expects 7-8% YoY LTL growth for Shoppers Stop in Q3FY15. Lower growth in Shoppers Stop was due to high competition from online retailers. Online retailers have created disruption in minds of consumers. LTL Durga Puja sales were in the range of 8-9% YoY. LTL sales growth in FY16: Shoppers Stop’s LTL sales growth can be in double digits in FY16. Demand scenario: Consumption should rise much faster in H1FY16 as actual on-ground recovery starts. Also, food inflation is expected to soften further. East India: Highest growth came from East India in Q2FY15, which grew by more than 17% YoY. SSL has a strong presence in Kolkata which is driving growth. Siliguri and Durgapur have also done well. Store additions: The company has added 5 departmental stores in H1FY15. 1 store was added in October 2014. 2 more stores will be added in Q4FY15. 6-8 departmental stores will be added in FY16. Contribution of apparel: Contribution of apparel sales will settle at ~62-63% as supply situation on duty improves. Fine jewellery: Fine jewellery category has declined. With gold prices crashing, investment in fine jewellery has gone down. Hence, demand for fine jewellery will be subdued till gold prices stabilise. Discounted sales: Even during sales season, only 20% of non-apparel category is on discount and 50% of apparel category is on discount. There has been 20-21% contribution of discounted sales to overall revenue. Private label brands in Shoppers Stop: Ad spends of private labels have been increased. Gross margin: Gross margin improved due to higher contribution by apparel sales. Apparel margins are much higher than non-apparel margins. LTL EBITDA: LTL EBITDA growth has been in double digits in Q2FY15. EBITDA margin of mature stores is upwards of 12% (100bps YoY improvement). EBITDA margin guidance: 6-6.5% in FY15 and 7.0-7.5% in FY16. Post FY16, management expects EBITDA margin to increase beyond 8%. Private label brands in Hypercity: Private label contributes more than 20% of sales in Hypercity, driven by fashion. More private label products across categories will come between Q4FY15 and Q1FY16. Hypercity: Hypercity had negative impact on volumes due to high inflation. 2 more Hypercity stores are left to be right-sized, which will be done by FY15 end. 25,000 square

Shoppers Stop


feet is expected to be right-sized in H2FY15. The company has exited furniture in many stores. 2 stores a year will be opened for the next 2-3 years. Hypercity margins: Hypercity margins have improved in Q2FY15 due to downsizing and change of distribution process. Contribution of fashion to Hypercity’s overall sales is expected to increase to 19% in FY16E. This will lead to 50-80bps YoY positive impact on margins in FY16. Hypercity breakeven: Out of 15 Hypercity stores, 9 have achieved breakeven at EBITDA level. Property options: Hypercity continues to hold 19 property options. The sell-off depends on the progress of construction and availability of buyers. The entire transaction should be completed in 2-3 years. ~75% of INR2bn of Hypercity's debt can be repaid through property auctions. Pune: 2 Shoppers Stop stores have been closed down in past 1 year. The new store in Pune is a replacement for these 2 stores and enjoys lower rentals. The new Pune store is different in terms of assortment and design. However, competitive intensity in the city remains high. Vizag: Vizag store was closed for 5 days due to cyclone Hudhud. There will not be a major impact on financials due to this temporary closure. Omni-channel launch: This launch is expected to be delayed and will now happen in H1FY16. Crossword: Franchise business of Crossword is profitable. However, this is a tough business to be in. Books contribute 50-55% to total franchise sales. Diesel price cut: There will only be a ~10bps overall positive impact on margins. Debt: Consolidated debt will increase by INR300-400mn till FY15 end from current level. Depreciation: Depreciation will be higher in FY15 due to write-offs related to right-sizing of stores. However, it will normalise in FY16. Tax rate: 300-400bps reduction is expected in FY16E. As the dependence of Hypercity on Shoppers Stop’s investments goes down, tax rate should reduce. Indian retail market: Of the USD500bn Indian retail market, modern retail is USD30bn. Online is USD3bn. Online discounted sales globally: Globally, online is a convenience and ssortment model. Discounting is not driving growth in mature markets. In US, out of top 10 players, 8 companies have omni-channel model. China: In China, departmental stores are losing share to online. Omni-channel has not developed much in China. Beauty brands: None of the beauty brands are available on online today because beauty brands do not want to be discounted brands.

Retail


Tier 2 cities: Most of Tier 2 expansion has happened in the past 3 years.

Location: 95% of stores are in malls.

SSL Q1FY15 concall | Key takeaways LTL sales growth: LTL sales growth for departmental stores was subdued at 3.7% YoY because four large stores were closed for renovation for 2-3 weeks in Q1FY15. LTL sales would have grown more than 8% YoY in the absence of closure for renovation. All the four stores, which were renovated in Q1FY15, are mature and currently contribute more than 15% to overall sales of Shoppers Stop’s departmental stores. All big stores have been renovated in Q1FY15 itself, precluding further closures. Renovation of stores in past 5 years: 15-18 stores were renovated in past 5 years. After renovation, sales growth has improved by 15-20% from earlier level. Cost of renovation: Cost of renovation (INR600-900 per square feet) is half that of opening a new store. Impact on footfalls of movie releases: Hardly any big movie was released in Q1FY15, which impacted footfalls. LTL sales growth for mature stores: Average LTL growth for mature stores (after excluding closure for renovation impact) is 5-6% YoY vis-à-vis the 1% YoY decline reported. LTL sales growth in FY15E: LTL growth is expected to be 7-8% YoY in FY15E. LTL sales per square feet in Hypercity: LTL sales per square feet grew 6.4% YoY for Hypercity. Average selling price (ASP): ASP is down 1.7% YoY for departmental stores because of change in mix more towards apparel (lower price than non-apparels). Share of apparels: Share of apparels has increased YoY. Since apparel share has increased, gross margins have improved. Jewellery segment: Jewellery segment is still struggling. Management expects the segment to pick up in Q3FY15 and Q4FY15. Sales season: In FY15, the summer sales season will also be on for 6 weeks (same as last year). Till now, sales season has gone well and SSL has reported double digit LTL growth. Among other factors, reduction of period of sales season from current 6 weeks depends on better coordination between retailers. Garment margin: Garment margin in departmental stores at 42-44% is higher than Hypercity’s 35-36%. Hypercity’s EBITDA breakeven: Two third Hypercity stores have achieved EBITDA breakeven. Management expects to achieve EBITDA breakeven in Hypercity business in FY15. The company will also aim to achieve PAT breakeven in FY16.

Shoppers Stop


Fashion mix target for Hypercity: Fashion mix target is 15% for Hypercity in FY15 (14.9% in Q1FY15). This target is likely to be achieved in Q2FY15 itself. Benefit of right-sizing of Hypercity stores: The company has benefited due to lower cost because of down-sizing of stores. Even after downsizing of Amritsar store from 150,000 square feet to 60,000 square feet, sales have remained the same. Hypercity CEO: The company is on the lookout for a CEO for Hypercity. A new CEO is likely to be finalised in the next 3 months. Opening of stores: SSL will be adding 8 new departmental stores in FY15. It aims to open 3 stores in Q2FY15 and 3 stores in H2FY15. 2 Hypercity stores will be opened in H2FY15. Elections: Post elections, mood has improved. Improvement in sentiment will start reflecting from July 2014. Monsoon: If monsoon is normal, there will not be too much inflationary pressure. Omni-channel retailing: SSL has done extensive research on this model. E-retailing is a USD1.2tn business globally. Since the past few months, various global brick and mortar retailers like Walmart and Marks & Spencer have made significant inroads in the click and collect model. Activation: In FY14, SSL achieved additional sales of INR1bn due to activation. In Q1FY15 also, the company achieved INR250mn of additional sales due to activation. Property options: Brokerage has been paid for two apartments in Q1FY15. 17 property options are still remaining with SSL. SSL debt: INR4.81bn. SSL debt can achieve peak of INR5.4bn in FY15E. Post that, it is likely to taper off.

Retail


Outlook and valuations: Positive; maintain ‘BUY’ SSL is one of the best run retail companies and will reap benefits of its expansion strategy. We expect SSG to be aided by likely recovery in urban sentiments due to strong Central government with focus on improving urban infrastructure and creating 100 new cities. SSL has maintained its retail space expansion momentum even amidst slowdown which will aid future growth. In Q2FY15 LTL sales growth saw a sharp recovery at 11% YoY despite high base of 15.5% YoY; however for FY management has guided for 7-8% SSG due to hyper competition from online retailers. We expect consumer demand recovery to kick-in starting FY16E. Space rationalization benefits in Hypercity are beginning to surface reflected in positive Company level EBITDA for the first time and improved sales per sq ft (18+ quarters high). We expect the format to turn profitable in FY16E. We value SSL on EV/sales as it is operating at low profitability (due to losses in Hypercity and sharp expansion in departmental stores), which does not reflect inherent profitability of current business (thus EV/EBITDA or P/E valuations are not fair). In anticipation of recovery in consumer demand in FY16 and lofty valuations earned by online retailers (USD7bn valuation for Flipkart based on its latest round of funding) we increase our FY16E EV/sales target for SSL’s departmental business to 1.3x (1x earlier) while maintain Hypercity’s business of 0.8x, arriving at target price of INR605. Maintain ‘BUY/Sector Performer’.

Table 1: Target price

Source: Edelweiss research

Q2FY15 FY16E Methodology Target

multiple Per share

contributionShoppers stop Sales 40,506 EV/Sales 1.3x 52,658Hypercity (51%) Sales 5,074 P/S 0.8x 4,059EV (INR mn) 56,717less debt (INR mn) 7,049add: cash + investments (INR mn) 583Net cash (INR mn) 50,251No of shares (mn) 83Value of share (INR) 605

Shoppers Stop


Trent Q2FY15 Results | Key details • Total income increased by 30.4% YoY.

• COGS increased by 30.8% YoY.

• Ad spends increased by 62.4% YoY.

• Staff cost increased by 41.7% YoY.

• EBITDA increased by 6.8% YoY.

• EBITDA margin declined by 104bps YoY.

• Depreciation increased by 96.2% YoY.

• Reported PAT decreased by 26.7% YoY.

• Like to like sales of Westside format increased by 12% YoY. (overall 19% YoY higher)

Table2: Trent – Financial snapshot

Source: Company, Edelweiss research

Year to March Q2FY15 Q2FY14 % change Q1FY15 % changeNet Sales 3,498 2,671 31.0 3,148 11.1Other operating income 154 130 18.3 72 114.3Total Income 3,652 2,801 30.4 3,220 13.4Cost of goods sold 1,935 1,479 30.8 1,564 23.7Gross profit 1,718 1,322 29.9 1,656 3.7Advertising & publicity 110 68 62.4 82 34.2Staff costs 307 217 41.7 279 10.2Other expenditure 1,128 876 28.7 1,107 1.9Total expenditure 1,546 1,161 33.1 1,468 5.3EBITDA 172 161 6.8 188 (8.4)Depreciation 96 49 96.2 115 (16.6)EBIT 76 112 (32.3) 72 4.6Other income 98 101 (2.1) 84 17.7Interest and financial charges 18 17 0.3 18 (2.8)PBT 157 195 (19.7) 138 13.5Provision for taxation 41 68 (39.0) 229 (81.9)Core Profit 115 127 (9.3) (91) (227.0)Add: Exceptionals (net of tax) (1) 29 NM 702 (100.1)Minority interest 0 0 NM 0 NMReported PAT 114 156 (26.7) 611 (81.3)

as % of net salesCOGS 53.0 52.8 16 48.6 439Advertising & publicity 3.0 2.4 59 2.6 47Staff costs 8.4 7.7 67 8.7 (25)Other expenditure 30.9 31.3 (39) 34.4 (349)EBITDA 4.7 5.7 (104) 5.8 (112)EBIT 2.1 4.0 (192) 2.2 (17)PBT 4.3 7.0 (267) 4.3 0Net profit 3.1 5.6 (244) 19.0 (1,585)Tax rate 26.5 34.9 (841) 165.7 (13,926)

Retail


Pantaloons Q2FY15 Results | Key Details • Total income increased by 13.6% YoY.

• COGS increased by 5.1% YoY.

• Gross margin increased by 466bps YoY.

• Rent increased by 15.8% YoY.

• Staff cost increased by 19.5% YoY.

• EBITDA increased by 632.0% YoY.

• EBITDA margin improved by 467bps YoY.

• Depreciation increased by 122.7% YoY.

• PAT remained constant.

• PAT margin improved by 107bps YoY. Table 3: Pantaloons – Financial snapshot


Year to March Q2FY15 Q2FY14 % change Q1FY15 % changeNet Sales 5,439 4,812 13.0 3,813 42.7Other operating income 105 66 58.1 47 122.0Total Income 5,544 4,879 13.6 3,860 43.6Cost of goods sold 3,190 3,035 5.1 1,996 59.8Gross profit 2,354 1,844 27.7 1,864 26.3Rent 720 622 15.8 683 5.5Staff costs 465 389 19.5 448 3.8Other expenditure 861 790 9.0 776 11.0Total expenditure 2,047 1,802 13.6 1,908 7.3EBITDA 307 42 632.0 (44) (805.1)Depreciation 455 204 122.7 456 (0.2)EBIT (148) (162) (8.7) (499) (70.3)Other income 5 10 (46.0) 1 390.9Interest and financial charges 292 283 3.4 283 3.3PBT (435) (435) (0.0) (781) (44.3)Provision for taxation - - NM - NMCore Profit (435) (435) (0.0) (781) (44.3)as % of net salesCOGS 57.5 62.2 (466) 51.7 583Rent 13.0 12.8 24 17.7 (470)Staff costs 8.4 8.0 41 11.6 (322)Other expenditure 15.5 16.2 (66) 20.1 (457)EBITDA 5.5 0.9 467 (1.1) 666EBIT (2.7) (3.3) 66 (12.9) 1,026PBT (7.8) (8.9) 107 (20.2) 1,239Net profit (7.8) (8.9) 107 (20.2) 1,239Tax rate 0.0 0.0 - 0.0 0

Shoppers Stop


Table 4: V-mart – Financial snapshot


V-mart Q2FY15 concall | Key takeaways Performance in Q2FY15: The semi urban economy, which is largely dependent on the monsoon, has been affected adversely due to the erratic and below normal rains (mainly in key markets of UP and Bihar) further dampening the usually weak Q2 resulting in lower than expected sales growth. Extraordinary write-off on account of damage to the store in Srinagar due to floods further impacted PAT. It will take two more months to get that store on track. Bhopal store was relocated in Q2FY15. Festive season: Diwali mood has been pretty good. Footfalls and conversions in the festive season have been similar to 2013. Conversion ratio: Conversion ratio at 65% has been going down from 70% in previous quarters due to higher fashion sales. Earlier, higher FMCG sales led to higher conversion. Store additions: The company added 5 new stores in Q2FY15. 4-5 stores will be added in Q3FY15. As on date, V-mart has 102 stores in operation. Capex plan in Q3FY15: 4-5 stores in Q3FY15.

Year to March Q2FY15 Q2FY14 % change Q1FY15 % changeIncome from operations 1,443 1,220 18.2 1,648 (12.4)Other operating income 3 1 104.9 3 10.2Total Income 1,446 1,222 18.3 1,650 (12.4)Cost of goods sold 1,035 870 18.9 1,132 (8.6)Gross profit 411 352 16.8 518 (20.6)Staff costs 111 91 22.5 105 5.9Other expenditure 245 181 35.3 226 8.4Total expenditure 356 272 31.0 331 7.6EBITDA 55 80 (31.6) 187 (70.7)Depreciation (11) 25 NM 50 NMEBIT 66 55 20.9 137 (51.6)Other income 5 1 510.0 13 (64.1)Interest and financial charges 15 14 5.8 14 3.5PBT 56 41 35.4 136 (58.6)Provision for taxation 18 13 NM 44 (58.6)Core Profit 38 28 35.1 92 (58.7)Add: Exceptionals (net of tax) (11) - NM (2) NMReported PAT 27 28 (3.5) 90 (69.9)

as % of net sales 0 0 0 0 0COGS 71.6 71.2 37 68.6 295Staff costs 7.7 7.4 26 6.4 133Other expenditure 17.0 14.8 212 13.7 325EBITDA 3.8 6.5 (276) 11.3 (753)EBIT 4.6 4.5 10 8.3 (370)PBT 3.9 3.4 49 8.2 (434)Net profit 1.9 2.3 (42) 5.5 (359)Tax rate 32.2 32.1 13 32.2 4

Retail


Store closure: No stores have been closed in H1FY15. UP and Bihar: UP and Bihar have more than 60% of the company’s total stores. Inventory: Inventory has gone up from INR1.67bn at FY14 end to INR2bn in Q2FY15 due to stocking related to festive season. E-retail: Very small impact on V-Mart so far. V-mart does not have any immediate plans to go online. Employees: The company has ~35 employees per store. A total of 4000 employees are at frontend and 200 employees are at backend. 80-85% of total employees (mostly frontend) are paid minimum wages. New warehouse: The company will completely move to a new warehouse from Q3FY15. It will take 6-8 months for operations from this warehouse to streamline.

Flipkart gets USD7bn valuations Flipkart which is the leading online retailer in India raised fresh capital of USD1bn from its existing investors including Tiger Global, Naspers and Government of Singapore Investment Corp. To raise this capital Flipkart has been valued at ~USD7bn which is more than double of the USD2.6-3bn valuation it got it its last round of funding done in May, 2014.

Chart 1: Sales growth YoY Chart 2: SSL’s same store sales growth


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Chart 3: LTL volume growth for departmental stores Chart 4: Sales per sq ft on chargeable area

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Retail


Chart 9: Private label mix Chart 10: Percentage sales mix

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16.0

24.0

32.0

40.0

Mens Ladies Childrens Non Apparels

(%)

Q2FY14 Q2FY15

Shoppers Stop


Table 5: Hypercity—P&L snapshot


(INR mn) Q2FY15 Q2FY14 % change (YoY)Retail sales (including VAT) 2,479 2,344 5.8 Retail sales (net of VAT) 2,304 2,170 6.1 Gross margin 516 470 9.7 DC cost 19 30 (37.3) Shrinkage 13 15 (10.9) Margin on sales 484 425 13.8 Store operating expenses 469 469 0.0 Other retail operating income 76 57 33.9 Store EBITDA 91 13 597.7 Profit on sale of property options - - NMService office expenses 89 139 (36.2) Company EBIDTA 2 (126) NMExceptional item - - NMDepreciation 71 47 50.4 Finance charges 95 85 11.9 PAT (164) (258) NM

Retail


Financial snapshot (INR mn) Year to March Q2FY15 Q2FY14 % change Q1FY15 % change YTD15 FY15E FY16E Net revenues 9,084 7,758 17.1 6,502 39.7 15,586 48,178 56,693 Raw material costs 5,987 5,155 16.1 4,007 49.4 9,994 32,047 37,539 SG&A 1,010 876 15.2 786 28.5 1,795 5,699 6,712 Employee expenses 581 495 17.4 528 10.1 1,109 3,419 4,027 EBITDA 555 398 39.6 308 80.2 863 1,813 2,261 Depreciation 359 230 55.9 109 228.5 469 704 1,072 Other income 43 33 30.7 34 26.4 77 102 132 Interest 196 167 17.1 199 (1.4) 394 1,108 1,189 Exceptionals Profit before tax 278 166 67.6 13 2,095.0 290 123 495 Provision for taxes 118 66 78.5 5 2,207.9 124 266 412 Core profit 159 99 60.4 8 2,017.9 167 (143) 83 Minority interest (323) (274) Net profit 159 99 60.4 8 2,017.9 167 180 358 Diluted EPS (INR) 1.9 1.2 60.0 0.1 2,017.9 2.0 2.2 4.3 As % of net revenues Purchases (% of revenue) 65.9 66.4 61.6 64.1 66.5 66.2 Employee cost 6.4 6.4 8.1 7.1 7.1 7.1 SG&A 11.1 11.3 12.1 11.5 11.8 11.8 EBITDA 6.1 5.1 4.7 5.5 3.8 4.0 Reported net profit 1.8 1.3 0.1 1.1 0.4 0.6

Shoppers Stop


Company Description SSL, part of the K Raheja Group of Companies, is a focused luxury segment department store player. It has presence in high opportunity segments like home improvement through Home Stop; infant and mothers to be care through Mothercare (a franchise with Mothercare PLC); cosmetics and beauty care through M.A.C. and Clinique (a retail agreement with Estee Lauder); the books and music space through Crossword; and in airport retailing through a JV with Nuance from Switzerland. It also acquired majority stake in HyperCity, a hypermarket venture promoted by a group company which focuses on mass segment of retailing. Shopper’s Stop Ltd along with its associate companies HyperCity Retail (India) Ltd and Timezone Entertainment Pvt. Ltd operates more than 5mn sq ft in the country. Investment Theme The Indian retail landscape is evolving with interplay of several demographic and economic factors. The big opportunity lies in the growing share of organised retail with the growing trend among consumers to allocate a larger share of income to consumption and gradual improvement in lifestyle. The improving liquidity is also positive as it means better delivery of retail space for expansion. SSL is a niche play with strong brand position in the lifestyle space. It has assiduously positioned itself as a retailer since 1991 of superior quality products and services, offering an international shopping experience. This strong positioning and brand recall gives the company a strategic advantage in the light of increasing competition. With its steadfast focus on systems and processes and its ability to attract global brands as venture partners, it is well placed to emerge as a leading departmental store player in the long run.

Key Risks Store rollout delays

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

Pressure on margins due to cost escalation and competition Escalation in lease rentals

Escalation in lease rentals and administration expenses can impact margins.


Retail

Financial Statements

Income statement (INR mn)

Year to March FY13 FY14 FY15E FY16E

Net revenue 33,603 39,614 48,178 56,693

Materials costs 22,619 26,295 32,047 37,539

Gross profit 10,983 13,319 16,131 19,154

Employee costs 2,359 2,918 3,419 4,027

Electricity expenses 884 1,019 1,258 1,510

Rent and lease expenses 2,754 3,218 3,942 4,643

Other Expenses 3,215 3,945 4,512 5,314

Advertisement & sales costs 810 887 1,187 1,398

EBITDA 961 1,334 1,813 2,261

Depreciation & Amortization 791 981 1,108 1,189

EBIT 171 353 704 1,072

Other income 69 62 102 132

EBIT incl. other income 240 415 806 1,204

Interest expenses 547 653 684 709

Profit before tax (307) (239) 123 495

Provision for tax 228 257 266 412

Net profit (535) (496) (143) 83

Prior period adjustments (net) (8) (8) - -

Minority interest (430) (420) (323) (274)

Profit after minority interest (113) (83) 180 358

Shares outstanding (mn) 83 83 83 83

Diluted EPS (INR) (1.4) (1.0) 2.2 4.3

Dividend per share (INR) 0.8 0.8 0.6 1.3

Dividend payout (%) (55.1) (75.4) 30.0 30.0

Common size metrics


Electricity expenses 2.6 2.6 2.6 2.7

Rent and lease expenses 8.2 8.1 8.2 8.2

Materials costs 67.3 66.4 66.5 66.2

Advertising & sales costs 2.4 2.2 2.5 2.5

EBITDA margins 2.9 3.4 3.8 4.0

Net profit margins (0.3) (0.2) 0.4 0.6

Growth ratios (%)


Revenues 14.1 17.9 21.6 17.7

EBITDA (6.9) 38.7 35.9 24.7

Net profit (159.4) (26.7) (317.4) 98.7

EPS (159.2) (26.7) (317.4) 98.7

Key Assumptions

Year to March FY13 FY14E FY15E FY16E

Macro

GDP(Y-o-Y %) 5.0 4.8 5.4 6.3

Inflation (Avg) 7.4 6.2 5.5 6.0

Repo rate (exit rate) 7.5 8.0 8.0 7.3

USD/INR (Avg) 54.5 60.5 60.0 59.0

Company

Revenue growth (Y-o-Y %)

Shoppers - Departmental store sales growth (%) 16.9 19.2 15.0 18.0

Shoppers - departmental store - Total No. of

56 71 79 82

Shoppers - departmental store - New store

5 15 8 3

Shoppers - departmental- NEW Space addition

- 0.8 0.4 0.1

Shoppers - departmental- Total Space (mn sq. ft) 3.1 3.9 4.3 4.4

Shoppers - SSS growth (%) 7.4 9.0 9.5 9.5

Shoppers - Growth on new stores (%) - 20.6 7.4 2.5

HyperCity net sales growth (%) 6.9 12.7 5.9 7.0

HyperCity New store addition - 3 2 1

HyperCity Total stores 12 15 17 18

HyperCity- New space addition (mn Sq ft) (0.1) - - -

HyperCity Total Retail Space (mn sq. ft) 1.2 1.2 1.2 1.2

HyperCity - SSS growth (%) 5.0 4.0 6.0 7.0

EBITDA margin (%)

Shoppers - COGS as % of sales 64.7 63.9 63.6 63.6

COGS as % of sales 67.3 66.4 66.6 66.3

Staff costs as % of sales 7.0 7.4 7.1 7.1

A&P as % of sales 2.4 2.2 2.5 2.5

Electricity expenses as % of sales 2.6 2.6 2.6 2.7

Rent and lease expenses as % of sales 8.2 8.1 8.2 8.2

Financial assumptions

Tax rate (%) 35.0 41.0 30.5 30.0

EBITDA margin 2.9 3.4 3.7 3.9

Capex (INR mn) 1,100 1,200 1,333 1,400

Interest payments 547 653 703 776

Debtor days 3 4 4 4

Inventory days 57 57 58 58

Payable days 57 57 57 57

Cash conversion cycle (days) 2 4 6 6

Interest rate on o/standing debt (%) 11.7 11.4 10.9 11.5

Depreciation as % of gross block 8.2 9.0 9.0 8.8

Dividend as % of net profit (55.1) (75.4) 30.0 30.0

Debt 4,982 6,449 6,749 7,049


Shoppers Stop

Peer comparison valuation

Market cap EV/EBITDA (X) EV/Sales (X) ROAE (%)

Name (USD mn) FY15E FY16E FY15E FY16E FY15E FY16E

Shoppers Stop 668 26.1 21.0 1.0 0.8 3.6 7.0

Future Retail 462 5.8 5.1 0.7 0.6 (1.3) 1.2

Jubilant Foodworks 1,341 29.7 19.3 4.1 3.1 21.5 25.2

Titan Company 5,417 26.3 21.6 2.9 2.4 30.6 31.2

Median - 26.2 20.1 1.9 1.6 12.6 16.1

AVERAGE - 22.0 16.8 2.2 1.7 13.6 16.1

Source: Edelweiss research

Cash flow metrics


Operating cash flow 869 884 1,555 1,865

Investing cash flow (1,216) (2,083) (1,333) (1,400)

Financing cash flow 472 1,182 (123) (260)

Net cash flow 125 (17) 99 206

Capex (1,100) (1,200) (1,333) (1,400)

Dividends paid (135) (135) (63) (126)

Profitability & efficiency ratios


ROAE (%) (1.9) (1.4) 3.6 7.0

ROACE (%) 1.7 3.3 6.0 8.8

Inventory day 57 57 58 58

Debtors days 3 4 4 4

Payable days 57 57 57 57

Cash conversion cycle (days) 2 4 6 6

Current ratio 1.5 1.4 1.4 1.4

Debt/EBITDA 5.2 4.8 3.7 3.1

Debt/Equity 1.0 1.3 1.3 1.3

Adjusted debt/equity 1.0 1.3 1.3 1.3

Interest coverage 0.3 0.5 1.0 1.5

Operating ratios


Total asset turnover 3.4 3.7 4.1 4.7

Fixed asset turnover 5.3 5.7 6.3 7.4

Equity turnover 6.6 8.0 9.7 11.0

Valuation parameters


Diluted EPS (INR) (1.4) (1.0) 2.2 4.3

Y-o-Y growth (%) (159.2) (26.7) (317.4) 98.7

CEPS (INR) 3.1 5.8 11.6 15.3

Diluted PE (x) (363.1) (495.5) 227.9 114.7

Price/BV (x) 8.2 8.4 8.2 7.8

EV/Sales (x) 1.4 1.2 1.0 0.8

EV/EBITDA (x) 47.4 35.3 26.1 21.0

Dividend yield (%) 0.2 0.2 0.1 0.3

Balance sheet (INR mn)

As on 31st March FY13 FY14 FY15E FY16E

Equity capital 415 416 416 416

Reserves & surplus 4,594 4,489 4,605 4,838

Shareholders funds 5,009 4,905 5,022 5,254

Minority interest (BS) 46 15 15 15

Short term debt 2,932 2,204 2,350 2,500

Long term debt 1,775 3,220 3,375 3,525

Current maturity of long term

275 1,025 1,025 1,025

Borrowings 4,982 6,449 6,749 7,049

Deferred tax liability 63 100 100 100

Sources of funds 10,099 11,468 11,885 12,417

Tangible assets 6,205 7,242 7,334 7,344

Intangible assets 216 335 335 335

CWIP (incl. intangible) 319 367 500 700

Total net fixed assets 6,740 7,944 8,168 8,379

Goodwill on consolidation 987 1,019 1,019 1,019

Non current investments - - - -

Cash and equivalents 268 279 377 583

Inventories 3,698 4,490 5,092 5,965

Sundry debtors 322 480 528 621

Loans and advances 3,038 3,234 3,234 3,234

Other current assets 289 342 342 342

Total current assets (ex cash) 7,347 8,547 9,196 10,162

Trade payable 3,783 4,405 4,961 5,811

Others current liabilities 1,459 1,915 1,915 1,915

Total current liabilities &

5,242 6,320 6,876 7,726

Net current assets (ex cash) 2,104 2,227 2,321 2,436

Uses of funds 10,099 11,468 11,885 12,417

Book value per share (INR) 60.2 58.9 60.3 63.1

Free cash flow (INR mn)


Net profit (113) (83) 180 358

Add : Non cash charge 916 1,221 1,469 1,624

Depreciation 791 981 1,108 1,189

Others 125 241 360 434

Gross cash flow 803 1,138 1,649 1,981

Less: Changes in WC (328) (209) 94 116

Operating cash flow 1,131 1,348 1,555 1,865

Less: Capex 1,100 1,200 1,333 1,400

Free cash flow 31 148 222 465


Retail

Top 10 holdings

Perc. Holding Perc. Holding

Reliance Capital Trustee Co Ltd 6.90 Bajaj Allianz Life Insurance Co 2.48

Lombard Odier Darier Hentsch & C 2.16 Birla Sun Life Asset Management 1.49

Idfc Mutual Fund 1.38 Sundaram Asset Management Co Ltd 0.88

Uti Asset Management Co Ltd 0.78 Reliance Life Insurance Co 0.39

Dimensional Fund Advisors Lp 0.27 Axis Asset Management Co Ltd 0.26

*as per last available data

Insider Trades

Reporting Data Acquired / Seller B/S Qty Traded No Data Available

*in last one year

Bulk Deals Data Acquired / Seller B/S Qty Traded Price 21 Feb 2014 Metropolitan Trading Company Sell 448750 377.00 21 Feb 2014 Miraj Marketing Company Llp Buy 448750 377.00

*in last one year

Additional Data

Directors Data Chandru L. Raheja Chairman Ravi C. Raheja Director Neel C. Raheja Director Prof. Nitin Sanghavi Independent Director Deepak Ghaisas Independent Director Nirvik Singh Independent Director B. S. Nagesh Vice Chairman Govind Shrikhande Managing Director Avnish Bajaj Independent Director Abanti Sankaranarayanan Independent Director

Auditors - Deloitte Haskins & Sells, Mumbai; Internal Auditors: KPMG

*as per last annual report


Company Absolute

reco

Relative

reco

Relative

risk

Company Absolute

reco

Relative

reco

Relative

Risk

Future Retail HOLD SU H Jubilant Foodworks BUY SP M

Shoppers Stop BUY SP L Titan Company BUY SO L

RATING & INTERPRETATION

ABSOLUTE RATING

Ratings Expected absolute returns over 12 months

Buy More than 15%

Hold Between 15% and - 5%

Reduce Less than -5%

RELATIVE RETURNS RATING

Ratings Criteria

Sector Outperformer (SO) Stock return > 1.25 x Sector return

Sector Performer (SP) Stock return > 0.75 x Sector return

Stock return < 1.25 x Sector return

Sector Underperformer (SU) Stock return < 0.75 x Sector return

Sector return is market cap weighted average return for the coverage universe within the sector

RELATIVE RISK RATING

Ratings Criteria

Low (L) Bottom 1/3rd percentile in the sector

Medium (M) Middle 1/3rd percentile in the sector

High (H) Top 1/3rd percentile in the sector

Risk ratings are based on Edelweiss risk model

SECTOR RATING

Ratings Criteria

Overweight (OW) Sector return > 1.25 x Nifty return

Equalweight (EW) Sector return > 0.75 x Nifty return

Sector return < 1.25 x Nifty return

Underweight (UW) Sector return < 0.75 x Nifty return


Retail

Edelweiss Securities Limited, Edelweiss House, off C.S.T. Road, Kalina, Mumbai – 400 098. Board: (91-22) 4009 4400, Email: [email protected]

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

Nischal Maheshwari Co-Head Institutional Equities & Head Research [email protected] +91 22 4063 5476

Nirav Sheth Head Sales & Strategy [email protected] +91 22 4040 7499

Coverage group(s) of stocks by primary analyst(s): Retail Future Retail, Jubilant Foodworks, Shoppers Stop, Titan Company

Distribution of Ratings / Market Cap

Edelweiss Research Coverage Universe

Rating Distribution* 151 44 9 205 * 1 stocks under review

Market Cap (INR) 144 56 5

Date Company Title Price (INR) Recos

Recent Research

31-Oct-14 Titan Company

Blockbuster Q2; Q3 likely to be muted; Result Update

419 Buy

30-Oct-14 Jubilant Foodworks

SSG weak; gross margin and store expansion on track; Result Update

1,308 Buy

08-Oct-14 Retail Improvement in consumer confidence eludes QSRs; EdelFlash

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

Buy Hold Reduce Total

Rating Interpretation

Buy appreciate more than 15% over a 12-month period

Hold appreciate up to 15% over a 12-month period

Reduce depreciate more than 5% over a 12-month period

Rating Expected to


Shoppers Stop

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Retail

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