Retail - Liquidity Management Key To Success

India Equity Research

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Retail

Monthly Update

RETAIL Liquidity management key to success

February 11, 2009

Pantaloon Retail’s revenues grew 24% in Jan; SSS back in the positive Pantaloon Retail’s (PRIL) monthly sales showed some signs of improvement with a 24% growth Y-o-Y against 14.6% in December and 4% in November. Value retail (VR) at INR 4.5 bn comprised 65.6% of total revenues and grew 21%, while lifestyle retail

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

(LR) at INR 1.7 bn grew 22% and accounted for 24% of revenues. Same store sales (SSS) growth improved in the month with VR growing at 4% and LR at 12% after a decline of 4% and 14%, respectively, in December. However, Home retail (HR) stayed negative at 4%. The high SSS in LR is a surprise and in our opinion a result of promotional offers. PRIL expands further with addition of 0.2 mn sq ft The company added four Big Bazaars (including Food Bazaars), five KB Fair shops and two E-Zones in January, totaling to 0.2 mn sq ft. At a standalone level, 0.19 mn sq ft space was added this month as against 0.3 mn sq ft in the past three months. The total addition of space till date stands at 1.5 mn sq ft at the consolidated level and 1.2 mn sq ft at the standalone level. This is in line with our expectation of 1.9mn sq ft of addition for the full year). Funding constraints persist; liquidity management key to survival All the organised retailers are currently hit by liquidity constraints with equity capital drying up and their debt funding getting difficult to service. We believe in the next twelve to eighteen months retailers who are able to manage their balance sheets most efficiently and ensure sufficient liquidity in the business are best placed to tide over the current consumption slowdown. With retailers like Subhiksha and Vishal Retail facing cash shortages, we expect expansion to take a back seat, and profitability and capital conservation (through inventory management and downsizing of unprofitable stores) to gain prominence. We expect value retailers with presence across consumption categories (like PRIL) to fare better in such conditions. Key developments in the sector „

Subhiksha battling for survival; INR 3 bn needed to avoid collapse

„

Carrefour talking with Future Group for India entry

„

Trent to promote Inditex’s Zara stores in India

„

Shoppers Stop and Home Retail Group, UK, to wind up their catalogue retail operations under the Hypercity-Argos brand

„

Cafe Coffee Day to manage Shoppers Stop’s BRIO, Desi Café; MoU signed

„

Birla Retail to shut unviable stores even as it continues to expand; recently ~50 unviable stores shut

„

FMCG firms cut credit exposure to modern-day retailers

„

Book and gift retailers beat slowdown; witness lower dip in revenues than food and grocery retailers.

(The above highlights are based on news articles in leading dailies)

Edelweiss Research is also available on Bloomberg EDEL , Thomson First Call, Reuters and Factset.

Edelweiss Securities Limited 1

Retail

Pantaloon Retail- monthly sales numbers improve; slowdown concerns persist PRIL revenues in Jan grow 24% ; YTD growth at 34% Total revenues grew 24% to INR 6.9bn with value retail (VR) bringing up 65% of revenues, lifestyle retail (LR) 24% and home retail (HR) the balance. This is an improvement over the 3.8% growth in November and 14.6% growth in December.

VR grew 21%, LR 22%, and HR

grew 32.5%. Chart 2: VR grows at 21% and LR at 22%

150.0

150.0

6,800

120.0

120.0

5,100

90.0

3,400

60.0

1,700

30.0

30.0

0.0

0.0

Total

 

Total Revenue Growth

VR % Y-o-Y

 

Oct-08

Dec-08

Jun-08

Aug-08

Apr-08

Feb-08

Oct-07

Dec-07

Jun-07

Aug-07

Apr-07

Feb-07

Oct-06

Dec-06

Jun-06

60.0

Aug-06

(%)

90.0

Dec-08

Jun-08

Sep-08

Mar-08

Dec-07

Jun-07

Sep-07

Mar-07

Dec-06

Sep-06

Jun-06

-

(%)

(INR mn)

Chart 1: Total revenue growth at 24% 8,500

LR % Y-o-Y

Source: Company reports, Edelweiss research

Same store Sales growth numbers improve, but pressures visible The same store sales (SSS) growth improved in the month to 4% in VR and 12% in LR. HR however continued with negative SSS at 4.3%. This is an improvement over the negative SSS growth seen in December. However the growth numbers for VR are lower than the YTD growth of 7.7%. The YTD growth in LR stands at 5.8% and 1.4% for HR.

45.0%

40.0%

30.0%

20.0%

15.0%

0.0%

0.0%

-20.0%

-15.0%

-40.0%

-30.0%

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

 

Chart 4: Jump in LR SSS due to promotions

60.0%

  

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

Chart 3: SSS turn positive in VR

Source: Company reports, Edelweiss research

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Retail Space addition of 0.2 mn sq ft takes total space to 10.5 mn sqft The company added 4 Big Bazaar’s (including Food Bazaars), 5 KB Fair shops and 2 E- Zones in the month of Jan totaling to 0.2 mn sq ft. At a standalone level the space addition stood at 0.19 mn sq ft. This is an improvement over the addition of 0.3 mn sq ft in the last three months. The YTD addition stands at 1.3 mn sq ft in line to meet our estimate of space addition of 1.9 mn sq ft for FY09. Food Bazaar gains principal share in FMCG sale through modern retail Based on Nielson data, Food Bazaar’s (FB) share in FMCG products being distributed through modern trade stands at 28% with its share in top 8 cities like Ahemdabad, Pune, Kolkatta, Delhi-NCR, Mumbai is in the range of 35-49%. PRIL has 50% share in Pune and 48% in Kolkata which imply a significant market share.

In terms of the key categories FB has

maintained a consistent share between 20-33% and is also gaining share in categories like refined edible oil, biscuits, packaged tea, beverages, packaged atta, noodles, washing powders, soaps, skin creams, shampoo and toothpastes. Table 1: Food bazaar gains principal share

Market Ahmedabad

MT:TT (%)

FB:MT (%)

7.0

49.0

Bangalore

19.0

21.0

Hyderabad

28.0

13.0

Kolkata

6.0

48.0

Mumbai

19.0

35.0

Pune,

19.0

50.0

5.0

38.0

Delhi NCR Chennai

13.0

4.0

Rest of India

3.0

26.0

All India

5.0

28.0

  Categories

December

2008

MT:TT (%)

FB:MT (%)

Refined Edible oils (%)

9.0

26.0

Washing Powders / Liquids

7.0

33.0

Biscuits

3.0

27.0

Skin Creams

6.0

29.0

Toilet Soaps

4.0

28.0

Beverages

8.0

22.0

PackagedTea

5.0

29.0

Shampoo

7.0

32.0

Chocolate

5.0

14.0

PackagedAtta

8.0

21.0

Others

5.0

29.0

All India

5.0

28.0

 

 

Source: Company, Edelweiss research

Edelweiss Securities Limited 3

Retail Key takeaways from retail company December 2008 results „

Slowdown in revenue momentum visible even in a festive quarter, with 24% growth Y-oY and 2.5% decline Q-o-Q, on account of marked dip in footfalls. Industry reports peg mall footfall decline at ~25%. SSS growth dipped sharply and turned negative for many retailers.

„

Revenue per sq. ft (PSR) dipped for most retailers, with the exception of Shoppers Stop (SSL). This signals declining volumes and limited lever of price increase.

„

Massive inventory liquidation experienced with rampant discounts and promotions. Nonmoving apparel inventory causes concern; likely inventory mark-downs in Q4.

„

Efforts at cost cutting yield EBITDA growth of 34% Y-o-Y and ~70bps improvement in EBITDA margins. Rentals softened in Q3; however, future of planned malls uncertain.

„

Scarcity of capital and over dependence on debt funding adversely impacted margins and scaled down expansion plans. PAT for the group declined 4.4% Y-o-Y.

(Included in the group are Pantaloon Retail (PRIL), Shoppers Stop (SSL), Vishal Retail (VRL), Koutons Retail (KRL), and Titan Industries (Titan). Only PRIL and SSL are under our coverage).

Table 2: Revenue growth unimpressive (INR mn) Dec-08 Dec-07

Pantaloon Retail

% grth

Sep-08

% grth

15,257

12,268

24.4

15,112

Shoppers Stop

3,626

3,266

11.0

3,601

1.0

Koutons Retail

2,418

1,731

39.7

2,824

(14.4)

Titan Inds

10,240

8,024

27.6

10,888

(6.0)

Vishal Retail Total

3,555 35,096

3,017 28,306

17.8 24.0

3,583 36,008

(0.8) (2.5)

0.7

Source: Company, Edelweiss research

Table 3: PAT for group dips 4.4% Y-o-Y (INR mn) Dec-08 Dec-07

Pantaloon Retail

% grth

Sep-08

5.8

% grth

335

317

Shoppers Stop

5

8

Koutons Retail

131

123

196

(33.2)

Titan Inds Vishal Retail

379 22

308 156

23.1 (85.9)

871 41

(56.5) (46.3)

Total

872

912

(4.4)

1,287

(32.3)

(46.4) 6.5

362 (183)

(7.4) (102.5)

Source: Company, Edelweiss research

Liquidity key concern for retailers; capital being conserved Subhiksha’s cash crunch situation is just the first in the line of many more liquidity squeeze examples to follow, in our opinion. With debt levels at the maximum and almost no cash in the business, many retailers are in line to face a similar situation. A look at the numbers for the period ending December 2008 shows that most retailers are highly levered and are battling interest payments in the range of 11-14%. Interest expenses have impacted profits significantly; despite a 35% EBITDA expansion, PAT has declined 4.4%. Maintaining store inventory levels and meeting monthly expense is the topmost priority of the companies. Towards the same, working capital cycles are being shortened and expansion plans are being delayed or put on hold. PRIL has scaled down its expansion plans and VRL has frozen addition of stores. SSL has indicated that new stores will be funded only by internal accruals and expansion will be limited to that extent. Titan has, however, retained its expansion plans, but is evaluating location and deal with developers minutely. We believe that going forward the companies will have to undergo the painful process of getting their balance sheet back in shape and this will prepare them for the revival in consumption.

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Retail Table 4: 9 month snapshot; interest costs impact PAT expansion

Revenue

% Y-o-Y 31.3

EBITDA

% Y-o-Y

3,122

PAT

52.1

Int/sales

SSL

10,220

20.7

VISH

18,252

166.0

2,260

165.0

383

26.0

KUTN

6,820

61.5

1,232

51.7

436

30.0

7.1

NA

TTAN

29,592

34.2

2,417

45.0

1,572

70.0

0.6

NA

NA

13.6

Debt

30,369

(19)

697

% Y-o-Y

PRIL

(391)

NA

4.7

29,000

2.0

2,700

6.4

7,650

Source: Company reports, Edelweiss research Revenue, EBITDA, PAT and Debt numbers in INR Mn, others in %

Correct errors of past; manage growth better An analysis of the annual accounts from FY05 to FY08 for PRIL, SSL, VISH, and KUTN shows that the revenue growth for the group stands at 65%, PAT growth at 57%, but the TCE has grown by 99% and inventory by 87%. The revenue growth has lagged the investment in inventory in all cases as has the profitability. Stock turns have declined in the period, inventory days have gone up with a lesser than proportionate increase in credit period and the cash conversion cycle has resultantly increased. A large part of working capital has been funded by debt due to minimal cash flows (due to expansion phase) and hence interest burden has also steadily increased. Chart 5: Revenue growth lags inventory growth

Chart 6: Days inventory held on the rise 400

250.0%

320

(Inventory days)

200.0% 150.0% 100.0% 50.0%

240 160 80

0.0%

0 PRIL TCE

SSL

VISH

Inventory

KUTN

PRIL

Revenue

FY05

Note: Growth is CAGR over FY05-FY08

Chart 7: Interest coverage on the decline 15.0

SSL FY06

VISH FY07

KUTN FY08

Source: Company reports, Edelweiss research

Chart 8: D/E below comfort levels 3.0

2.4

9.0

1.8

(x)

(x)

12.0

6.0

1.2

3.0

0.6

0.0 PRIL FY05

SSL FY06

VISH FY07

KUTN FY08

Note: KRLs raised equity in FY08, hence ratios is low

0.0 PRIL FY05

SSL FY06

VISH FY07

KUTN FY08

Source: Company reports, Edelweiss research Edelweiss Securities Limited 5

Retail Key developments in the sector: Monthly roundup Liquidity concerns rampant 1.

Subhiksha battling for survival; INR 3 bn needed to avoid collapse „

Subhiksha’s operations are near standstill with the company facing severe liquidity crunch that has held up store rentals, salary payments, and vendor payments for close to three months.

„

2.

 

News reports have stated that 8‐10% of its stores may be closed and many  relocated to save rentals.  

FMCG firms cut credit exposure to modern retailers „

FMCG companies are squeezing their credit exposure to modern trade retailers from 30 days to 21 days or even 15 days.

„

Godrej has increased the frequency of supply to modern trade retailers from once a week to two-three times a week to reduce credit exposure

International retailers still excited about India 1.

Carrefour likely to tie up with Future Group for India entry „

Europe’s largest retailer Carrefour seems to be in advanced talks with Future Group for a joint venture to set up cash-and-carry outlets in India. This will be similar to the agreement between Bharti group and Wal-Mart and the Tatas and UK’s Tesco.

„

The talks centre around creating an entity that will serve as a major supply-chain entity for all Future Group store formats and enable the Indian company to significantly cut costs.

2.

Trent to promote Inditex’s Zara stores in India „

Trent has recently announced the formation of a joint venture with the Inditex group to develop and promote the company’s Zara stores in India. Inditex will hold 51% stake in the joint venture with Trent holding the remaining 49%.

„

Inditex is a leading Spain-based fashion retailer with strong retail presence under Zara, Pull and Bear, Massimo Dutti, Bershka, Stradivarius, Oysho, Zara Home and Uterque brands. It has ~4,200 stores across 73 countries.

Focus on profitability and cost control 1.

Shoppers Stop (SSl) signs MoU with Cafe Coffee Day (CCD) to run BRIO, Desi Café „

This will be a revenue-sharing model between both the parties, entailing conversion of all existing outlets into CCD formats.

„

The day-to-day activities like managing the logistics and supply chain of individual stores would also be taken care of by CCD.

„

This collaboration will enable SSI to save costs and concentrate on the retailing part of its business.

2.

Birla Retail to shut ~50 unviable stores and relocate stores at better rentals „

To counter the ongoing slowdown Birla Retail is renegotiating rentals and shutting down unviable stores.

„

The company plans to increase the share of private label in its stores to as much as 60% of the total merchandise for better margins.

Edelweiss Securities Limited 6

Retail th

Edelweiss Securities Limited, 14 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

Shriram Iyer

Head

[email protected]

+91 22 2286 4256

Research

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

Recent Research Date

Company

Title

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

15-Dec-08

Retail

81

Rating

Accumulate Reduce 62

28

Sell 10

Total 184

* 2 stocks under review / 1 rating withheld > 50bn Market Cap (INR)

66

162

Accum.

Rating Interpretation

Edelweiss Research Coverage Universe

Rating Distribution*

Sell

Collaborate to Tide over tough times; Sector Update

Distribution of Ratings / Market Cap

Buy

Price (INR) Recos

Between 10bn and 50 bn 51

< 10bn 67

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

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