Retail - Growth Improves, Expansion Slows Down

India Equity Research

|

Retail

Monthly Update

RETAIL Growth improves, expansion slows down

March 17, 2009

Pantaloon Retail’s revenues grew 31% in February; SSS sustained Pantaloon Retail’s (PRIL) monthly sales grew 31% Y-o-Y against 24% in January. Value retail (VR), at INR 3 bn, comprised 56% of total revenues and grew 30%, while lifestyle retail (LR) at INR 1.7 bn grew 21% and accounted for 32% of revenues. Same

Priya Ayyar +91-22-4063 5413 [email protected]

store sales (SSS) growth improved in the month with VR growing at 5% and LR at 4%. However, Home retail (HR) stayed negative at 10%. PRIL expansion slows down; addition of 0.1 mn sq ft in the month The company’s space addition slowed down with addition of only one Big Bazaar (including Food Bazaar), one Brand Factory and one Furniture Bazaar, totaling to 0.1 mn sq ft. The total addition of space till date stands at 1.6 mn sq ft at the consolidated level and 1.3 mn sq ft at the standalone level. The company has lowered its addition plans for FY10 in light of the capital crunch and the testing business environment. Brand strength and inventory management help branded apparel majors Large branded apparel majors have been impacted by the slowdown in consumption, and challenging business conditions have brought their margins under pressure. However, strength of the brands, together with effective discounts and promotional offers, has aided growth. Also, conservative inventory policies have mitigated any serious obsolescence risk, and orders for the forthcoming season have been planned better. This gives the apparel brands an edge over other multi brand apparel focused retailers who are stuck with non moving stock. Key developments in the sector The FDI policy was changed and excluded indirect investment through domestic companies from overall sectoral ceilings. But foreign investment will have to comply with the relevant sectoral conditions. It however looks unlikely that multi brand retail can get foreign capital as per these guidelines. Future Group looking to rejig business into four separate entities and unlock value through stake sale. It is examining a structure that would enable it to strike a JV with a global retailer  Bharti Retail decides to close 4-5 non-performing ‘Easyday’ stores. Future Group and Hidesign close to signing JV. They plan to launch an Indiaoriented lifestyle brand, Holii, to cater to the mid-to-mass market segments. Future Group to buy stake in Turtle: The Turtle Group currently operates 32 exclusive outlets across the country with presence in over 1,200 multi-brand stores. Provogue is likely to invest INR 250 mn on stores expansion by FY10. These stores will be spread out equally in metros as well as in tier II and tier III cities. Reliance Retail outlines plans to expand its non-veg retail chain ‘Delight’. It is looking to add 500 by the end of 2009 and 1,000 by 2010. Infiniti to open 20 Croma retail stores with an investment of INR 600-800 mn in 2009-10, taking the total number of stores across the country to 50. Branded apparel companies are investing more in B and C-class markets with competitive pricing strategies to cash in on their potential. (The above highlights are based on news articles in leading dailies) In this update we have included key takeaways from our meeting with Raymond India. Edelweiss Research is also available on Bloomberg EDEL , Thomson First Call, Reuters and Factset.

Edelweiss Securities Limited 1

Retail

PRIL: Sales numbers improve; expansion slows PRIL revenues in February grow 31%; YTD growth at 34% Total revenues grew 31% to INR 5.3 bn with VR generating 56% of revenues, LR 32% and HR the remaining. This is an improvement over the 14.6% growth in November and 23.5% growth in January. VR grew 30%, LR 21% and HR grew 26%. Chart 2: VR grows at 30% and LR at 21%

8,500

150

150

6,800

120

120

5,100

90

90

3,400

60

1,700

30

(%) 30

VR % Y‐o‐Y

Feb‐09

Oct‐08

Jun‐08

Feb‐08

Oct‐07

Jun‐07

Jun‐06

Total Revenue Growth

Feb‐07

0

Feb-09

Oct-08

Jun-08

Feb-08

Oct-07

Jun-07

Feb-07

Oct-06

Jun-06

0

Total

 

60

Oct‐06

0

(%)

(INR mn)

Chart 1: Total revenue growth at 31%

LR % Y‐o‐Y

Source: Company reports, Edelweiss research

SSS growth numbers improve, but pressures visible The same store sales (SSS) growth improved in the month to 5.3% in VR and dipped to 4% in LR. HR, however, continued with negative SSS at 10%. This is an improvement over the negative SSS growth seen across all segments in December. However, the growth numbers for VR are lower than the YTD growth of 7.4% and the growth in LR has dipped from January levels. The YTD growth in LR stands at 5.6% and is flat for HR. Chart 3: SSS improve to 5% in VR

Chart 4: LR SSS fluctuate due to promotions

60.0%

40.0%

40.0%

30.0% 20.0%

20.0%

10.0% 0.0% 0.0% -20.0%

-10.0%

-40.0%

 

Jun-06 Aug-06 Oct-06 Dec-06 Feb-07 Apr-07 Jun-07 Aug-07 Oct-07 Dec-07 Feb-08 Apr-08 Jun-08 Aug-08 Oct-08 Dec-08 Feb-09

Jun-06 Aug-06 Oct-06 Dec-06 Feb-07 Apr-07 Jun-07 Aug-07 Oct-07 Dec-07 Feb-08 Apr-08 Jun-08 Aug-08 Oct-08 Dec-08 Feb-09

-20.0%

  Source: Company reports, Edelweiss research

Edelweiss Securities Limited 2

Retail Space addition of 0.1 mn sq ft lags target The company added 1 Big Bazaar (including Food Bazaar), 1 Brand Factory and 1 Furniture Bazaar Factory outlet in February, totaling to 0.1 mn sq ft - way below the December and January levels. The YTD addition stands at 1.4 mn sq ft at the consolidated level and 9.2 mn sq ft at the standalone (excluding home solutions) level. The company is looking at lower spec addition in FY10 as well, given the capital crunch, testing business environment and the uncertain consumption trends. We expect the company to close FY09 with 10 mn sq ft and FY10 with 12.2 mn sq ft at the standalone level. Chart 5: Space addition lags target

500

11.5 11.1 11.0

11.0

300

10.7

10.7

10.5

10.8 10.5

10.1

200

10.0

9.8 100

9.5

0

9.0 July

Aug

Sept

Consolidated

Oct

Nov

Standalone

Dec

Jan

(mn sq. ft)

('000 sq.ft)

400

Feb

Total space Source: Company, Edelweiss research

Edelweiss Securities Limited 3

Retail Key takeaways from discussions with branded apparel players We spoke to Madura Garments (Madura) and Raymond India (Raymond) to gain insights into their branded apparel business and understand the challenges they face and the benefit of their strong brands. Some key takeaways are as follows: ƒ

Revenue growth in the festive quarter (October-December 2008) was below expectations with Raymond posting a growth of 1% and Madura 6%. However, Raymond posted positive SSS growth in the quarter at 3%. Discounting attracted a fair amount of serious shoppers, which led to the branded players performing better than most multi-brand outlets (MBOs) in terms of like-to-like growth.

ƒ

Companies over the last few years have been investing in Exclusive Brand Outlets (EBOs) in addition to the MBO chain. Several of the new stores added in the nine months have hit the overall profitability and could take much longer to break even. The slower demand conditions and high startup cost has led to closure of some unviable stores (both company operated and franchisee operation). Future expansion is being evaluated carefully to conserve capital. Madura currently operates 328 stores spread over 0.65 mn sq ft, while Raymond operates 556 stores across its formats. 

Table 1: Q3 snapshot

(INR mn)

Madura

Dec-08

Dec-07

Revenue

2,344

2,215

60

196

2.6

8.8

EBITDA EBITDA (%)

Dec-08

Dec-07

Revenue

Raymond

1,460

1,440

EBITDA

130.0

170.0

8.9

11.8

EBITDA (%)

% grth

9MFY09

5.8 (69.4)

% grth

6,034

190

425

2.7

7.0

9MFY09

1.4 (23.5)

9MFY08

6,959

9MFY08

% change 15.3 (55.3)

% change

4,060

3,700

9.7

429.0

461.0

(6.9)

10.6

12.5

 

Source: Company, Edelweiss research ƒ

Savings in the form rental renegotiation are expected, but the benefit is yet to accrue. Also, costs of operations have seen some softening.

ƒ

Franchisee stores are doing well and recent competition that had caused some franchises to shift has died down and some franchisees have come back. The franchisee store expansion is expected to continue. Madura operates close to 50% of its stores through franchisees.

ƒ

Conservative inventory valuation methods and strong systems have helped branded apparel majors limit their inventory pile up compared with other retailers dealing predominantly in apparel. Periodic provisions for obsolescence and effective mix of fashion and regular merchandise have ensured that the inventory is not outdated and with promotions and discounts will be cleared out by end of FY09. Additionally, the sourcing for the next fashion seasons has become prudent.

ƒ

Branded players are looking at tier III and IV cities keenly as they have still held up much better than the metros and tier I cities. Currently, around 50% of Raymond’s stores are in tier III and lower cities.

ƒ

Players expect the pressure on footfalls to continue, but believe serious shoppers will come at good prices. Hence, the discounting could continue for a while and value brands like Peter England are expected to grow faster than the premium ones in the near term.

Edelweiss Securities Limited 4

Retail

Visit Note: Raymond India Pioneer in branded retail Raymond India (Raymond) is a leading integrated producer of worsted suiting fabric in the world, with a capacity of producing 31 mn mtrs of wool and wool-blended fabrics. A pioneer in the textile and men’s apparel business, the Raymond Group is horizontally and vertically integrated and offers end-to end solutions for fabrics and garmenting. It has developed a successful range of brands, appropriately positioned to cater to the expanding base of Indian consumers whose demand for premium products is steadily on the rise. The company’s branded apparel business is housed in its subsidiaries Raymond Apparel and Colorplus. Branded apparel accounts for 22% of the total group revenues. Attractive brand bouquet The Raymond Group has an attractive portfolio of brands that have been positioned carefully to cater effectively to changing trends and emerge as leaders in their respective segments. Apart from its leading brands Raymonds, Park Avenue, Parx, and ColorPlus, the company has Zapp!’- an exclusive brand in the kidswear segment. It has also launched ‘Notting Hill’, a value–for-money brand in the popular price segment.

Manzoni: A luxury lifestyle brand providing the best in contemporary international style & luxury offers a super premium range of suits, trousers, jackets, shirts, and accessories. Park Avenue: A premium contemporary formal wear brand and occasion wear brand in India. Park Avenue Woman: A complete range of Business Wear for working women professionals. ColorPlus: ColorPlus is among the largest premium category smart casual wear brand in the country. ColorPlus Woman: An exclusive range of smart-casual clothing accessories. Parx: A premium casual lifestyle brand comprising a range of semi formal and casual cottons; blends and denim wear Notting Hill: Notting Hill reflects style and manifests originality of today's fashion-conscious and discerning young professionals at an affordable price. Zapp!: A stylish offering children in the age group of 4-12 can choose from a wide range of clothes, and accessories

  Source: Company

Strong brand positioning Raymond has invested in these brands over the years and has successfully gained acceptance as one of the most respected brands in the country. The goodwill has helped it manage the slowdown in consumption much better than peers and also attract serious customers with some discounting. It is one of the few brands that have managed to show improvement in the like–to-like store growth this year. Additionally, the brand strength has attracted and retained very good franchises, which has strengthened the company’s distribution network.

Edelweiss Securities Limited 5

Retail Fig. 1: Group product positioning

Source: Company

Pan-India retail network; franchisee model put to use efficiently Raymond Group’s products are retailed through ‘The Raymond Shop’ (TRS) and a distribution network comprising more than 18,000 MBOs and over 500 exclusive retail outlets in more than 170 cities. It is one of the earliest players to adopt the franchisee model of growth in India. It has a strong franchisee following with many franchisees operating multiple stores across brands. This is an indicator of the company’s brand popularity, which has helped it reach catchments untapped by many other retailers. The strong franchisee group has also allowed quicker acceptance of new brands. Raymond has also established international presence with 31 outlets overseas (in the Middle East, Sri Lanka and Bangladesh). The company through its EBOs has strengthened individual brand positioning and improved accessibility. Its domestic retail network comprised 556 stores as of December 2008.

600

600

480

480

147

156

165

371

380

391

Q1

Q2

Q3

360

360

(No. of stores)

(No. of stores)

Chart 6: Steady store addition

240

120

240 120 0

0 FY06

FY07

FY08

Dec-08

EBOs

TRS Source: Company

Edelweiss Securities Limited 6

Retail Some key numbers ƒ

The company operates 556 stores (Dec 08), covering 1.3 mn sq ft. This includes 391 TRS and 165 other EBOs.

ƒ

Its operations span more than 170 cities in the country with around 50% of the stores in tier III and smaller cities and towns.

ƒ

It has added 76 new stores in the last nine months.

ƒ

It was looking to operate 1,000 stores by FY11; these plans have, however, now been reassessed, and focus is on adding stores judiciously in smaller towns.

Focus on smaller towns for growth Many apparel majors have begun consolidating their operations to derive higher growth rates from tier-III and below markets. Raymond currently operates around 50% of its stores in these markets and plans to increase its presence there, as the class three, class four, class five towns are still holding up very well. Roughly, organised retail brands and unbranded apparel have proportional market share of almost 50:50 in metros, while this ratio varies from 80:20 to 90:10 in smaller markets. Branded majors are now hoping to cash in on this potential at a time when consumption has dipped. Integrated model captures demand across value chain The company’s business model spans the apparel value chain right from fabric to retail. The Group has seven state-of-the-art textile plants and two garmenting factories in India, supported by world-class design studios and Italian designers who put together two collections every year. Strong designing skills complement its brands and retail network. Fig. 2: Integrated business model

Source: Company

The company has made adequate investments in IT and systems to ensure smooth operations across segments. This has enabled efficient inventory management and effective monitoring of franchisee operations which is crucial to ensure consistency in offerings. We believe that these investments in systems will help the company effectively manage its working capital and merchandise in the coming quarters. Appropriate planning for future seasons coupled with the right levels of inventory will ensure that precious capital is not blocked in the system.

Edelweiss Securities Limited 7

Retail Q3FY09 quarter snapshot: Branded apparel •

Net revenue growth of 1% Y-o-Y, to INR1.46 bn. Like-to-like growth at 3%. For the nine month period, revenue growth was at 17% and like-to-like at 6.6%.

•

Park Avenue grew by about 10% and Parx by ~15%, ColorPlus, however, saw some decline in the quarter.

•

EBITDA margins dipped to 9% in the quarter due to challenging business environment.

•

Some savings in the form of lower rentals have started coming in, however renegotiations are underway for other stores. .

•

At the PBT level, the Y-o-Y decline was 68%.

Chart 7: Brand revenue mix

Others 23% Park Avenue 37%

ColorPlus 24% Parx 16% Source: Company

Table 2: Key quarter numbers Q1

Revenue

(INR mn) Q2

Q3

9M FY09

% Y-o-Y

1,396

1,600

1,460

4,456

Ebitda

89

210

130

429

17.5 (6.9)

PBT

12

120

30

162

(45.6) Source: Company

Edelweiss Securities Limited 8

Retail

Key developments in the sector: Monthly roundup Business reorganisation and partnerships ƒ

Pantaloon demerger, preference deal on the cards: The company plans to create four separate entities for its retail verticals - lifestyle, value, financial, and support services business. PRIL will be the holding company and is likely to mop up INR 3 bn through stake sale.

ƒ

Bharti Retail decides to close 4-5 non-performing ‘Easyday’ stores: Bharti Retail operates a retail chain of 28 ‘Easyday’ supermarket stores in North India (Punjab, Haryana) and has decided to close down 4-5 of its non-performing stores. It is however looking to open a few more medium stores (30,000 sq ft) and expand small stores into other markets in Punjab and Haryana.

ƒ

Future Group and Hidesign close to signing JV:

 

The JV, which will be signed

between Future Ventures and Hidesign, will launch an India-oriented lifestyle brand, Holii. The product will be priced 30-40% lower than Hidesign, and the brand will cater to consumers in the mid-to-mass market segments. ƒ

Future Group to buy stake in Turtle: The Turtle Group currently operates 32 exclusive outlets across the country, including Ahmedabad, Bangalore, Chennai, Bhubaneshwar and Guwahati, and also has presence in over 1,200 MBOs. The company, which has two facilities in Kolkata and Bangalore, reported a turnover of INR 465 mn in 2007-08.

Expansion slows, but selective plans continue in FY10 ƒ

Provogue to invest INR 250 mn on stores expansion: Provogue plans to invest INR 250 mn towards setting up ~35 Provogue stores and eight Promart

stores by FY10,

spread across 800-4,000 sq ft. These stores will be spread out equally in metros as well as tier II and tier III cities of India. ƒ

Reliance plans 1,000 ‘Delight’ stores in 2 years: After food and grocery stores, Reliance Retail is giving a big push to its non-veg retail chain, Delight. Non-veg products deliver 20% margins against only 10-15% in food and grocery retailing. Despite protests the company has opened over 100 stores in Chennai, Bangalore and Mumbai. Further, it plans to open 500 stores by 2009 and 1,000 by 2010.

ƒ

Infiniti to open 20 Croma retail stores next fiscal: Infiniti plans to open 20 Croma stores with an investment of INR 600-800 mn in 2009-10, taking its total number of stores across the country to 50. Infiniti has technical and sourcing agreements with Australian retail giant Woolworths. The Australian company provides technical support and strategic sourcing facilities from its global network.

Rural markets attract retailers ƒ

Apparel

companies pin hopes on small towns: Branded apparel companies like

Madura Garments, Provogue, Raymond, and many others are investing more in B- and C-class markets with competitive pricing strategies. Roughly, organised retail brands and unbranded apparel have proportional market share of almost 50:50 in metros, while this ratio varies from 80:20 to 90:10 in smaller markets. Branded majors are now hoping to cash in on this potential at a time when consumption has dipped. Raymond is planning to come up with at least 100 retail stores, mostly in tier-II and tier-III cities, while Provogue is planning to open 65 retail stores in B- and C-grade cities. (The above highlights are based on news articles in leading dailies)

Edelweiss Securities Limited 9

Retail

Edelweiss Securities Limited, 14th Floor, Express Towers, Nariman Point, Mumbai – 400 021, Board: (91-22) 2286 4400, Email: [email protected]

Naresh Kothari

Co-Head

Institutional Equities

[email protected]

+91 22 2286 4246

Vikas Khemani

Co-Head

Institutional Equities

[email protected]

+91 22 2286 4206

Nischal Maheshwari

Head

[email protected]

+91 22 6623 3411

Research

Coverage group(s) of stocks by primary analyst(s): Retail Pantloon Retail & Shoppers Stop

Recent Research Date

Company

Title

11-Feb-09

Retail

Liquidity management Key to success; Monthly Update

05-Feb-09

Retail

Testing times ahead Sector Update

29-Jan-09

Shoppers Stop

Margins improve, but 97 revenue growth muted; Result Update

21-Jan-09

Pantaloon Retail

Macro headwinds dim outlook; Result Update

Distribution of Ratings / Market Cap

Rating Distribution*

74

Market Cap (INR)

68

162

Rating

Accumulate Reduce 63

30

Sell 10

Total 182

* 4 stocks under review / 1 rating withheld > 50bn

Sell

Accum.

Rating Interpretation

Edelweiss Research Coverage Universe Buy

Price (INR) Recos

Between 10bn and 50 bn 46

< 10bn 68

Expected to

Buy

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

This document has been prepared by Edelweiss Securities Limited (Edelweiss). Edelweiss, its holding company and associate companies are a full service, integrated investment banking, portfolio management and brokerage group. Our research analysts and sales persons provide important input into our investment banking activities. This document does not constitute an offer or solicitation for the purchase or sale of any financial instrument or as an official confirmation of any transaction. The information contained herein is from publicly available data or other sources believed to be reliable, but we do not represent that it is accurate or complete and it should not be relied on as such. Edelweiss or any of its affiliates/ group companies shall not be in any way responsible for any loss or damage that may arise to any person from any inadvertent error in the information contained in this report. This document is provided for assistance only and is not intended to be and must not alone be taken as the basis for an investment decision. The user assumes the entire risk of any use made of this information. Each recipient of this document should make such investigation as it deems necessary to arrive at an independent evaluation of an investment in the securities of companies referred to in this document (including the merits and risks involved), and should consult his own advisors to determine the merits and risks of such investment. The investment discussed or views expressed may not be suitable for all investors. We and our affiliates, group companies, officers, directors, and employees may: (a) from time to time, have long or short positions in, and buy or sell the securities thereof, of company (ies) mentioned herein or (b) be engaged in any other transaction involving such securities and earn brokerage or other compensation or act as advisor or lender/borrower to such company (ies) or have other potential conflict of interest with respect to any recommendation and related information and opinions. This information is strictly confidential and is being furnished to you solely for your information. This information should not be reproduced or redistributed or passed on directly or indirectly in any form to any other person or published, copied, in whole or in part, for any purpose. This report is not directed or intended for distribution to, or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction, where such distribution, publication, availability or use would be contrary to law, regulation or which would subject Edelweiss and affiliates/ group companies to any registration or licensing requirements within such jurisdiction. The distribution of this document in certain jurisdictions may be restricted by law, and persons in whose possession this document comes, should inform themselves about and observe, any such restrictions. The information given in this document is as of the date of this report and there can be no assurance that future results or events will be consistent with this information. This information is subject to change without any prior notice. Edelweiss reserves the right to make modifications and alterations to this statement as may be required from time to time. However, Edelweiss is under no obligation to update or keep the information current. Nevertheless, Edelweiss is committed to providing independent and transparent recommendation to its client and would be happy to provide any information in response to specific client queries. Neither Edelweiss nor any of its affiliates, group companies, directors, employees, agents or representatives shall be liable for any damages whether direct, indirect, special or consequential including lost revenue or lost profits that may arise from or in connection with the use of the information. Past performance is not necessarily a guide to future performance. The disclosures of interest statements incorporated in this document are provided solely to enhance the transparency and should not be treated as endorsement of the views expressed in the report. Edelweiss Securities Limited generally prohibits its analysts, persons reporting to analysts and their family members from maintaining a financial interest in the securities or derivatives of any companies that the analysts cover. The analyst for this report certifies that all of the views expressed in this report accurately reflect his or her personal views about the subject company or companies and its or their securities, and no part of his or her compensation was, is or will be, directly or indirectly related to specific recommendations or views expressed in this report. Copyright 2007 Edelweiss Research (Edelweiss Securities Ltd). All rights reserved Edelweiss Securities Limited 10