Retail - Tough Times Continue

April 06, 2009 | Retail

Retail

RESULT PREVIEW √

ANALYSTS

Tough times continue… We expect our coverage universe of retail companies to report 14.34% YoY revenue growth due to the expansion undertaken in the first three quarters of FY09. The EBITDA margin is expected to improve marginally by 30 bps due to the cost rationalisation measures undertaken by the companies. The net profit is expected to decline by 13.2% due to slowing sales and higher debt taken for working capital requirements.

Bharat Chhoda [email protected] Prerna Jhunjhunwala [email protected] Rahul Malhotra [email protected]

Highlights of the quarter During the quarter, retailers offered huge discounts to lure consumers to the stores and convert them into sales. Almost all the retailers announced a slowing of their expansion plans. They are in the process of closing their unviable stores and are resizing the existing large stores to make them profitable. They have also announced cost cutting strategies involving centralising of operations and renegotiating rentals with the mall developers. Franchise agreement was the most preferred route preferred by majority retailers due to the asset-light model nature of business.

Price performance (%) 1M 3M 6M 12M Koutons 15.84 -12.10 -33.74 -42.29 Vishal 23.31 -63.87 -84.96 -95.11

Broad sectoral outlook for Q3FY09E

The retail sector is facing a tough time due to changing consumer behaviour. In the challenging macroeconomic scenario, consumers are prioritising their requirements and savings are at the top of the list. Discretionary spends are being postponed to the future and only basic necessities are getting converted to purchases. Footfalls have been lower and the conversion rate has been higher due to purchase of basic necessities. The heavy discounts offered to lure customers to stores are expected to put pressure on operating margins. However, this pressure is expected to ease due to the cost cutting initiative taken by the retailers. The high debt to equity ratio remains a key concern for all retailers as profitability is also under pressure. India continues to be among the top retail destinations in the world. Value retail remains the preferred format for Indian consumers. We believe the investments in the sector will continue in the long-term. We are neutral on the sector due to the uncertain scenario in both the domestic as well as global economy. We will revisit our stand when the global and domestic economy nears stabilisation and better footfalls and conversion are seen happening in the sector.

Result Summary Exhibit 1: Coverage Universe (Consolidated)

Company Koutons Retail Vishal Retail Total

Sales (%) change JFM09 Y-o-Y Q-o-Q 497.54 34.00 105.80 291.05 -8.59 -18.12 788.59 14.34 32.05

EBIDTA (%) change JFM09 Y-o-Y Q-o-Q 88.80 24.40 103.95 34.60 -0.16 -20.99 123.40 16.37 41.30

(Rs. Crore) PAT (%) change JFM09 Y-o-Y Q-o-Q 37.95 6.72 184.97 1.95 -81.24 -9.43 39.90 -13.18 157.90

Source: Company, ICICIdirect.com Research

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Koutons Retail (KOURET) Koutons Retail India, a specialty discount company, operates through “Koutons” and “Charlie Outlaw” outlets throughout the country. At the end of Q3FY09, the company had a network of 1424 outlets (including Koutons and Charlie Outlaw outlets) across the country. The company follows an asset-light business model wherein 93% of stores are under franchise agreement. It primarily caters to the men’s apparel segment and is now increasing its offering to women and kids apparels, accessories and footwear segments. •

We expect Q4FY09 revenues to increase by 34.0% YoY to Rs 497.54 crore primarily driven by space expansion undertaken during the first three quarters. The revenue per sq ft is expected to decline by 12.49% due to the weak consumer sentiments with the ongoing economic slowdown

•

With the economic slowdown expected to continue for the next 12 to18 months, consumer sentiments have further weakened. The company, known for its discount retailing model, increased its discounts in the quarter. It offered flat 80% discount on almost all the products throughout the quarter to lure customers and survive in the tough macroeconomic scenario. As a result, the revenue per sq ft is expected to decline by 12.49% YoY. We expect the operating margin to decline to 17.8% in Q4FY09 from 19.2% in the corresponding quarter of the previous year

•

We expect approximately 42% of annual FY09E revenues to be reported in Q4FY09 due to the concentration of stores in the north

•

At the CMP of Rs 455 per share, the stock is trading at a P/E of 13.5x its revised FY10E EPS of Rs 33.70. We are positive on the asset-light model of the company and the value retail segment in which the company operates. We maintain our target price at Rs 505 with PERFORMER rating

Exhibit 2: Quarterly Estimates

Sales EBIDTA EBIDTA margin Profit Profit margin EPS

Q4FY09E 497.54 88.80 17.85 37.95 7.63 12.40

Q4FY08 371.29 71.39 19.23 35.56 9.58 11.62

Q3FY09 241.76 43.54 18.01 13.32 5.51 4.35

Y-o-Y (%) 34.00 24.40

Q-o-Q (%) 105.80 103.95

6.72

184.97

6.72

184.97

9mFY09 683.04 121.12 17.73 43.73 6.40 14.29

(Rs. Crore) FY09E 1180.58 209.92 17.78 81.68 6.92 26.69

Source: Company, ICICIdirect.com Research

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Vishal Retail (VISRET) Vishal Retail Ltd, incorporated in 2001 by Ram Chandra Agarwal, is in the business of value retailing with focus on Tier II and Tier III cities. The company operates 182 stores with a retail space of 2.9 mn sq ft across the country. The company sells over 100,000 stock keeping units (SKUs) across categories of apparels (60.1% of sales in Q3FY09), non-apparels (19.5%), FMCG (24%) and others (1.5%). In order to strengthen its operations, it has set up two manufacturing facilities with a total capacity of 5000 pieces per day. To ensure strong logistics support, the company established 29 warehouses in eight cities with a total space of 1.05 mn sq ft and a fleet of trucks for transportation. •

We expect Vishal Retail to report an 8.59% YoY decline in revenue on account of expected 31.8% YoY decline in revenue psf. The company is going through a severe liquidity crunch wherein inventory management is a key concern. Non-availability of right products coupled with weak consumer sentiments is expected to result in a decline in revenue for the quarter

•

We expect a 100 bps YoY increase in the EBIDTA margin on account of cost cutting measures adopted by the company including centralisation of distribution system

•

We expect the net profit to decline by 85% YoY to Rs 1.95 crore due to more than 100% expected increase in interest cost coupled with lower sales

•

At the current market price of Rs 40, the stock is trading at 3.4x its FY10E earnings of Rs 11.62 per share. The company is undergoing a severe liquidity crunch and has almost halted its expansion plans for the near term. In the current economic scenario, wherein the footfalls are reducing, consumer sentiments are weak and consumers are postponing their discretionary requirements, we believe the company will continue facing tough times for the next couple of quarters. We maintain our UNDERPERFORMER rating

Exhibit 3: Quarterly Estimates

Sales EBIDTA EBIDTA margin Profit Profit margin EPS

Q4FY09E 291.05 34.60 11.89 1.95 0.67 0.87

Q4FY08 318.41 34.65 10.88 10.40 3.27 4.64

Q3FY09 355.45 43.79 12.32 2.15 0.61 0.96

Y-o-Y (%) -8.59 -0.16

Q-o-Q (%) -18.12 -20.99

-81.24

-9.43

-81.24

-9.42

9mFY09 1090.34 134.93 12.37 20.27 1.86 9.05

(Rs. Crore) FY09E 1381.39 169.52 12.27 22.22 1.61 9.92

Source: Company, ICICIdirect.com Research

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Coverage Universe Valuation table

Koutons (KOURET) Vishal (VISRET)

M Cap CMP TP Rating (Rs Cr.) 455 505 1,392 P 40 46 90 UP

EPS FY08 FY09E FY10E 22.75 26.74 33.70 18.15 9.92 11.62

P/E (x) FY08 FY09E FY10E 20.00 17.02 13.50 2.20 4.03 3.44

EV/EBIDTA (x) FY08 FY09E FY10E 11.75 9.26 8.21 4.69 5.00 4.54

Source: Company, ICICIdirect.com Research

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ROCE ROE FY08 FY09E FY10E FY08 FY09E FY10E 19.16 19.04 19.13 19.87 18.94 19.27 12.57 12.64 13.76 14.99 7.57 8.15

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 Outperformer, Performer, Hold and Underperformer. The performance horizon is two years unless specified and the notional target price is defined as the analysts' valuation for a stock. Outperformer (OP): 20% or more; Performer (P): Between 10% and 20%; Hold (H): +10% return; Underperformer (UP): -10% or more; Pankaj Pandey

Head – Research

[email protected]

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