Shoppers Stop

TEAM ID – 2301

Recommendation: Accumulate

Shoppers’ Stop Ltd. Market Cap: Rs Cr. 2256

Price: Rs 660.0 12 Month Price Objective: Rs691

H I G H L I G H T S: • Shoppers’ Stop (SS) is the leading department store company in India. It has built robust management systems to capitalize on the growth potential in the organized retail space, particularly

Estimates

2007E 2008E 2009E

Net income

343.4

489.0

675.4

the bulk of its upside potential leaving little room for positive

EPS

10.0

14.2

19.6

surprise, in our view. We recommend an Equal-weight rating on

P/E

66

46.5

33.67

the stock with a target price of Rs 691

36.98

42

38.03

9.5

12.4

14

EPS Growth % ROE

the department store segment. However, the stock has priced in

•

SS enjoys a unique advantage of having a strong presence in the niche department store segment, which is likely to face limited competition from both foreign and domestic players. In our

(Rs. in million)

view, income elasticity in this business segment is high, and as India per capita incomes grows, SS should capitalize on its

Investment Argument • • •

•

•

• •

Fairly priced, Quality Company Best department store play Expansion in new segments to add value Rapid Store Expansion Driving Growth Strong Loyal Customer Base Built High Earnings Visibility Low risk company

•

growth potential. The company has a strong, loyal customer base, relatively high earnings visibility and low business risk, in our view. Efficient business systems, better/standard companywide business practices and a balanced portfolio lowers SS’s business risk. •

SS plans to enter new segments such as home improvement and hypermarkets (not captured in our earnings estimates). These can give up further upside to the stock if successful.

•

Given the 30% growth predicted in organized retail and SSL’s

Shareholding Pattern (%)

retail expansion plans, we expect the company to record a

Promoters 67.06 FIIs/NRIs/OCBs/GDR 6.82 MFs/Banks/FIs 13.65 Non Promoter Corporate 5.03 Public & Others 7.44

revenue CAGR of 31.6% on a consolidated basis over the next 3 years. The stock is currently trading at 58x our FY07E EPS of Rs.10 and 41x FY08E EPS of Rs.14. We estimate the DCF value of the company at Rs691. Since the stock is trading at around Rs660 it leaves a limited upside of 4.69 %.

Company background Shoppers’ Stop is promoted by the K Raheja Corp Group, one of leading players in real estate development and hotels. Shoppers’ Stop has progressed from being a single brand shop to a family orientated fashion and lifestyle store. Shoppers’ Stop operates under the departmental store format, and was one of the pioneers of the largeformat stores in India. Shoppers’ Stop has created a new business unit to manage its specialty businesses like Crossword, Mothercare, F&B business and MAC. Shoppers’ Stop: Represented Across Most Retail Segments

Exhibit 1, Source: Company Data

Management Structure The Chandu Raheja group holding structure is the promoter of Shoppers Stop with only the retail arm of the group listed.

Exhibit 2, Source: Company Data

2

Shopper’s Stop flagship store Shopper’s Stop flagship store has 20 stores with just under a 1 million Shoppers’ Stop flagship store has 20 stores with just under a 1 million square feet spread across top 10 cities.

square feet spread across top 10 cities. Apparel contributes around 60% of sales, while home, leather accessories, watches, jewellery and others forming the non apparels segment. SS has a private label program that contributes around 19-20% of sales.

Exhibit 3, Source: Company Data

Some of the private label brands:

Exhibit 4, Source: Company Data

First Citizen Program Shoppers’ Stop first citizen program is a membership program where customers pay Rs150 to become a member and avail value added benefits. HOME Venture– Good Potential Shoppers Stop has recently ventured into the home furnishing segment through its HOME venture stores.

3

Experimenting with the Hypermarket Segment SS’s group company Rainbow Retail Private Ltd set up the first SS’s group company Rainbow Retail Private Ltd set up the first hypermarket store has opened in Mumbai with

120,000 sq ft retailing space.

of

hypermarket store has opened in Mumbai with 120,000 sq ft of retailing space. It plans to have 7-8 stores operational by F08. Apart from these Shoppers’ stop is also present in the books segment through Crossword chain of stores. It has recently tied up with Mothercare through the franchise route, thus giving Shoppers’ Stop an advantage of synergy. Shareholding pattern Promoters holding in SS haven’t undergone any change since listing, with Promoters continuing to hold 67% of total share outstanding.

Public 5%

Others 7%

Mutual funds Banks and Fis 14%

FIIs 7%

Promoters 67%

Exhibit 5, Source: Company Data

4

Industry Analysis India has been rated as the most attractive destination globally by a survey of global retailers carried out by AT Kearney. The retail industry was pegged at USD 226bn in 2005. Of this organized retail accounted for just 3.4% of the overall retail pie. This is estimated to reach 10-12% by 2010.

Exhibit 6, Source: KSA Technopak & Company Data

India Retail Highlights The share of the organized retail market is expected to rise to a whopping 10% of the entire retail sales amounting to Rs.31 bn by 2010.

Highlights of the Indian retail sector over 2001, 2005 and the projections for the next five years show an immense potential for this sector. The share of the organized retail market is expected to rise to a whopping 10% of the entire retail sales amounting to Rs.31Bn by 2010.

5

Exhibit 7, Source: Company Data

Key growth drivers Favorable demographics, rising income as a trickle down effect of the rising GDP are among the major reasons for the retail boom.

Exhibit 8: Retail Boom

Rising consumer income: 5

100%

11

22

93

80%

150 230

60% 94 40%

98 40

20%

77

30

22 16

17 10

1995-96

2000-01

2006-07

0%

Destitue

Aspirants

Climbers

Consuming Class

Very Rich

Exhibit 9, Source: Company Data

6

The figures show that the income distribution of the country is not growing in a triangle form but a diamond form. This can be seen by the rapid growth of the Consuming class in the figure. Levels of Retail: While organized retail is possible in many categories, extent of its growth varies according to category. Organized retailers can operate as specialized chains catering to a particular category of retail or can be present in more than one retail category through a department store, hypermarket, etc.

Exhibit 10, Source: Company Data •

Level 1 - Returns in food and grocery score over Apparel category

•

Level 2 – Offers higher returns and has a faster payback period.

Factors affecting profitability in organized retail are: •

Revenue per square foot

•

Store size

•

Gross margins – share of private labels

•

Lease rentals/Operational costs/ Capital costs

7

Investment Thesis Sizing the Department Store Market Department stores cover a wide product range, typically included under the categories of apparel, footwear, personal care, and electronics. However, department stores typically focus on brands with an emphasis on the affluent consumer. According to a study instituted by Shoppers’ Stop the target market for department stores in the top 23 cities is around US$3-$5 billion. Indian consumers are likely to readily accept the department store format, as their need for ‘aspirational products’ has historically been satisfied through single product outlets offering a significantly poorer shopping experience.

Departmental store sales as apercentage of total retail sales

Potential for departmental stores market 16% 14% 12%

China

South Korea

Malaysia

10% 8% 6%

Thailand

4%

Indonesia

2%

India

0% 0

2000

4000

6000

8000

10000

12000

Per Capita Disposable Income

Exhibit 11, Source: AT Kearney

Department stores have been one of the high growth retail segments in Asia in the past few years. Improvement in incomes and higher aspirations are drawing consumers to increasingly shop in department stores. Given the early stages of retail development in India, new department stores provide a great way for consumers to aggregate their shopping experience in a single location. Rapid Store Expansion Driving Growth Shoppers’ Stop has planned an expansion plan by which it should have around 48 stores operating by the end of 2009. This translates to around 31mn sq ft space. 8

60 48

50 39

40 29

30 20

20 12 10

5

7

14

16

FY04

FY05

9

0 FY00

FY01

FY02

FY03

FY06 FY07E FY08E FY09E

Exhibit 12, Source: Company Data

Product Brand Proliferation Likely to Benefit SS In the past, most retailing companies in India couldn’t fill shelf space due to a lack of variety and availability in branded products. However, availability of branded products has increased sharply as Indian companies have invested in brand building to match the aspirations of consumers and foreign brands have increased through the franchisee route or direct exports.

160 138

160 140

114

120 100 80 60 40

15

17

22

F2000

F2002

F2004

20 0

Exhibit 13, Source: AC Nielson

Strong Loyal Customer Base Built SS has the strongest brand in the department store format in India, in our view. Its strong brand has been built on offering a wide range of products under one roof and the high quality service provided to customers. We see this as a key differentiator and competitive strength of SS, which will act as an entry barrier to competition.

9

Loyal Customer Base Steadily Rising Loyalty

Contribution of

Customers

sales

Jun-04

307,331.00

About 50%

Mar-05

410,000.00

Over 50%

Sep-05

500,000.00

Around 51%

Oct-05

540,000.00

Around 60%

Dec-05

608,000.00

Upto 60%

Mar-06

632,000.00

About 62%

Exhibit 14, Source: Company Data

Foreign Competition Likely to Remain Low Foreign competition in the department store segment should remain limited, at least for the foreseeable future, as most large players do not have a strong international strategy. However, domestic competition could mushroom given the attractiveness of the industry in India. Internal Sales Outside Home Market for Top Three Global Players per Retail Segment 2004 70% 58%

60% 50% 40% 30% 19%

22%

20% 12% 10%

8%

8%

0% Deparment Home Consumer Store Improvement Electronics

Hard Discounter

Apperal

Grocery

Exhibit 15, Source: AT Kearney

Conservative Financial Management The company’s philosophy is centered on keeping its total leverage under control. Total fixed operating cost as a percentage of gross margin is quite high in the department store business, resulting in high

10

operating leverage. Consequently, the company aims to balance this risk with lower financial leverage, thereby maintaining a lower debt to equity ratio – although this also limits growth potential. Lower Rental Costs - A Competitive Advantage Rental costs, at least for SS’s department stores, are under control for stores being developed in the next 2 years. In our view, lower rental costs are likely to be a key first-mover advantage for SS considering the recent sharp increase in rental costs. Departmental Stores: Net Margin Comparison: 3.40%

3.50%

3.50% 3.00% 2.50%

2.20%

2.00% 1.50% 1.00% 0.50% 0.00% Shopper's Stop

Industry Mean

Industry Median

Exhibit 16, Source: Company Data

High Earnings Visibility We see limited risk to earnings forecasts as SS has clear visibility for the next 3-4 years. A steady increase in store numbers through a tried and tested format (department store), limited competitive threat and relatively low financial risk enhance earnings visibility. Strengthening Dominance in Select Cities SS is strengthening its dominance in selected cities to improve its brand. The company has identified 21 cities where it will set up new stores with an estimated potential market of Rs150-200 billion. Dominating key cities will help the company amortize brand-building cost over larger number of stores, while building customer loyalty from improved store access.

11

Strong Presence Around 3 Key Cities

Exhibit 17, Source: Company Data

Focused on Delivering and Measuring Customer Service The number of awards and recognition the company has received for its brand and customer loyalty from industry observers also demonstrate its brand strength. The company also uses a Customer Satisfaction Index based on consumer surveys, which are also used for strategic planning. Award

Conferred By

Year

CMAI

2002, 2004

Super Brands Council

2003-05

Lycra Images Forum

2004

Bet Individual Retail Outlet Super Brand Status Most Preferred Retail Chain Most Admired Retail

Images Fashion

Destination

Forum

Most Admired

Images

Shopping Destination

2005

2006

Shoppers’ Stop Awards for Brands/Retail Formats Exhibit 18, Source: Company Data

12

Satisfied Set of Customers 64.00 63.00 62.00 61.00 60.00 59.00 58.00 57.00 56.00 55.00

63.20

62.40

62.50 60.30

61.00

58.20

May-02 Dec-02

May-03

Dec-03

S1 Aug-04

Jan-05

Exhibit 19, Source: Company Data

Training Employees to Deliver Customer Satisfaction SS relies heavily on employee training and managing employee satisfaction to maintain its most important competitive advantage, quality of service. Shoppers’ Stop – Employee Satisfaction Index 80

76.4

70 60

64.9 55.6

50 40 Dec-02

Dec-03

Dec-04

Exhibit 20, Source: Company Data

Offering Trust in Price and Quality versus ‘Mom and Pop’ SS has been able to successfully capitalize on this need for trust and has built strong brand equity with loyal customers. However, this USP may have to be reinvented quickly once SS sees competition in its own format.

13

Higher Entry Barriers Than Hypermarkets Department stores focus on merchandising and service as the key unique selling proposition (USP) and differentiators in their business. Although the differentiators appear easy to replicate, the reality is different. SS has built systems and procedures for sustaining and improving its service quality, a key differentiator, in our view. Brand

Owned By

Shoppers' Stop

Shoppers' Stop

Central

Pantaloon Retail

Lifestyle

Pyramid

Exhibit 21: Key Department stores in India

Preferred Partner for Foreign Players SS is the preferred partner/retailer for foreign brands entering India. The company has already signed an agreement with UK retailer Mothercare to retail their products. The company has tied-up Estee Lauder’s MAC brand of cosmetics with one strongly performing outlet opened so far. SS has also tied up with Austin Reed for both manufacturing and retailing its brand in India. We expect many more opportunities for similar tie-ups, particularly as the government has allowed up to 51% FDI in single brand retailing. Targeting Further Improvement in Efficiency The company manages in excess of 0.25 mn SKUs with four distribution centres catering to all their stores. The company’s distribution and logistics set up is networked to deliver merchandise to the store within 48 hours of receipt/generation of auto replenishment order. Private Label Contribution to be Limited to 25% The company is not keen to increase private label contribution beyond 25% in F08, as it wants to keep its inventory level under control and lower the potential overall risk for the company.

14

25.00% 20.10% 18.40%

20.00%

18% 16.00%

19%

15.00%

10.00%

5.00%

0.00%

S1

FY02

FY03

FY04

FY05

FY06

Exhibit 22, Source: Company Data Limited Private Label Expansion –

Managing Risk Strong Growth Likely We expect earnings growth at 41.12% CAGR in F2006-09 driven by a combination of new store openings. SS revenues are expected to grow at 45.67% CAGR during the period F2006-09. Operating profit margin is likely to fall by 11bps due to increased employee costs. The company has sufficient surplus build capacity at the central office to accommodate its growth until F08. Therefore, net profit margin should be sustainable as a significant plan of retail operation expansion in the same period is charted out. SS – Net Profit Margin to be sustained 4.650%

4.151%

4.150% 3.650%

3.709% 3.143%

3.127%

3.116%

3.372%

3.150% 2.650% 2.150% 1.650% 1.150% 0.650% 0.150%

FY04

FY05

FY06

FY07E

FY08E

FY09E

Exhibit 23, Source: Company Data, Projections

15

Efficiently Managed Company Shoppers’ Stop (SS) is a well run company with strong systems and procedures in place. The company has created a Manual of Authorities (MOA), which governs decision-making authority. It has also created a Standard Operating Procedures (SOPs) manual to govern most activities from site selection, store planning, store operations, buying and merchandising, distribution, and logistics

SWOT Analysis of Shopper’s Stop Strengths

Weakness

Pioneer in departmental format

Competition from standalone specialty stores

Loyal customer base Late foray into value retailing with 51% stake in promoter owned company

Low risk and sturdy business model Healthy financial position, low gearing

High spend on store makeovers and interiors to ensure a pleasant shopping experience

Presence across retail segments, lifestyle, value and specialty retailing

Opportunities

Threats

Expected 30% CAGR in organized retail to result in better footfall and conversion rates

Employee shortage and attrition due to rapid growth in retailing

Entry into Tier 2 and Tier 3 cities

Impact of slowdown in consumer spend to be felt on department stores

Collaboration with foreign players because of a national brand

Opening up of economy for free entry of foreign players

Exhibit 24, Source: Company Data, Projections

16

Investment Concerns Format is Vulnerable to Economic Environment Department store sales are more vulnerable to changes in the macro environment than most other retailing formats. Since most product categories in a department store are consumer discretionary, a potential slowdown in the economy could adversely affect the company. On the flip side, however, an improved macro environment and feel good factor in the economy would help boost its same-store growth rate. Differentiating Product Offering - Key Challenge We believe SS will face an increasing risk of commoditization unless it is able to differentiate its product offering by constantly improving its quality of service. Competition from Fragmented Players Although SS is likely to face limited competition in the department store format from large national players, the competitive threat from single-store owners could increase. Failure Risk in New Businesses If the company is not able to scale up the new businesses profitably and successfully, it could affect valuation and profitability. Stores Makeover Costs Could Hurt The company may have to refurbish its stores much faster than anticipated. This could result in additional expenses and loss of sales during refurbishment. Employee Costs Likely to Rise Although the company is continuously training people, rising competition is likely to put pressure on the company’s employee cost. High employee turnover and unavailability of sufficiently trained manpower are likely to put pressure on the company’s ability to grow.

17

Exhibit 28, Source: Company Data, Projections Rising Employee Costs

Valuations Valuing the Retail Opportunity India’s retail industry is at an evolutionary stage. In our view, the industry is likely to undergo significant transformation with respect to competition, market players and margin profile. It is difficult to estimate the potential evolution of the business during this transition period. Hence, any intrinsic value calculation for retail companies is fraught with risk that companies falter or overachieve on growth expectations. However, we believe that retailing will eventually grow into a sizeable industry, and the global experience suggests that most players will be reasonably profitable. Wide Range of Intrinsic Values As retail is potentially a high growth sector with most of its value driven by future expectations, intrinsic value is likely to be quite sensitive to growth assumptions. In our view, an intrinsic value range is more appropriate for this company than a single point estimate. Discounted Cash Flow Analysis We estimate the DCF value range to be about Rs600-700 per share, contingent on our growth assumptions. However, if we assume that, due to competitive pressures, the company is not able to deliver strong growth beyond F09 and growth falls significantly below nominal GDP growth – say at 5% p.a. – its DCF value works out at Rs298 per share. (refer Appendix for the details). The intrinsic value of Shoppers’ Stop works out to Rs.691.18 leaving an upside of 4.69% (CMP: Rs. 660).

18

APPENDIX SS: Projected Profit and Loss Account: F2004 to F2009E (Rs. in million) FY04

FY05

FY06

FY07E

FY08E

FY09E

3,090.2 952.5 80.4 4,123.1 0.0

4,237.7 1,084.5 76.0 5,398.2 113.7

6,295.0 832.2 116.3 7,243.5 316.5

10,710.4 1,415.9 197.8 12324.072 874.8

15,300.6 2,022.7 282.6 17605.915 1,455.3

19,501.9 2,578.1 360.2 22440.24 1,986.7

708.2 3,414.9 113.6 21.2 3,549.6

797.5 4,487.0 0.0 11.7 4,498.7

582.2 6,344.9 0.0 77.8 6,422.7

696.0 10,753.3 0.0 36.9 10,790.2

691.9 15,458.7 0.0 42.1 15,500.8

656.7 19,796.9 0.0 52.3 19,849.2

2,136.0 241.6

2,820.8 311.2

4,035.2 436.2

7,118.7 765.1

10,351.2 1,102.2

13,309.8 1,410.8

914.6 40.9 94.9 3,428.0

1,011.2 39.7 111.9 4,294.8

1,386.6 28.1 165.8 6,052.0

2,101.1 76.2 232.8 10,294.0

2,909.5 104.5 323.0 14,790.5

3,637.0 103.0 404.2 18,864.8

Profit before tax Tax charges

121.7 10.1

203.9 17.2

370.7 132.5

496.2 158.8

710.4 227.3

984.4 315.0

Profit after tax Minority interest (in Crossword) Net profit for the year Share capital Earning per share Basic Diluted

111.6 6.2 117.8 274.2

186.7 2.6 189.3 274.2

238.2 4.5 242.7 343.8

337.4 6.0 343.4 343.8

483.0 6.0 489.0 343.8

669.4 6.0 675.4 343.8

4.4 4.3

6.9 6.9

7.3 7.3

10.0

14.2

19.6

EBITDA EBIT

257.5 162.5

355.5 243.6

564.7 398.8

805.2 572.4

1,137.9 814.9

1,491.6 1,087.4

Income Retail turnover Own merchandise Consignment merchandise Other retail operating income Less: VAT set off Less: Cost of consignment merchandise Franchise Other income Expenditure Cost of goods sold Employee costs Operating and administrative expenses Interest and finance charges Depreciation and amortization

19

SS: Projected Balance Sheet: F2004 to F2009E (Rs. in million) FY04

FY05

FY06

FY07E

FY08E

FY09E

274.2 572.9 847.1 50.3

274.2 631.7 905.9 62.4

344.0 2,285.2 2,629.2 0.0

344.0 3184.6 3528.6 0.0

344.0 3527.9 3871.9 0.0

344.0 4425.8 4769.8 0.0

552.5 50.0 602.5 0.0 1,499.9

580.7 320.0 900.8 0.7 1,869.8

608.7 26.0 634.7 3.6 3,267.5

1411.4

1935.9

1907.9

4940.0

5807.8

6677.7

1,192.6 -353.0 839.6

1,442.1 -459.2 982.9

1,866.2 -564.5 1,301.7

2873.9 -878.2 1995.7

3987.7 -1218.5 2769.2

4990.1 -1524.8 3465.3

58.2 897.8 0.0

236.2 1,219.0 12.6

86.6 1,388.3 96.3

450.0 2445.7 433.0

650.0 3419.2 569.6

750.0 4215.3 997.1

562.2 61.7 14.7 483.2 1,121.8

629.4 64.8 14.9 667.0 1,376.2

737.0 92.6 1,137.9 765.4 2,733.0

1170.2 135.1 1100.0 957.3 3362.5

1701.6 192.9 700.0 1407.8 4002.3

2187.9 245.9 100.0 1738.9 4272.8

643.3

710.3

891.5

1267.7

2127.0

2734.9

0.5 643.8 478.0

31.5 741.9 634.4

58.8 950.3 1,782.7

33.6 1301.3 2061.2

56.4 2183.3 1819.0

72.5 2807.4 1465.4

Miscellaneous expenditure Profit and loss account Total Assets

8.7 115.4 1,499.9

3.8 0.0 1,869.8

0.0 0.0 3,267.4

0.0 0.0 4940.0

0.0 0.0 5807.8

0.0 0.0 6677.7

Current assets + fixed assets

2,019.6

2,595.3

4,121.3

5358.3

6771.5

7738.0

Sources of funds Shareholders' funds Share capital Reserves and surplus Minority interest Loan funds Secured loans Unsecured loans Deferred tax liability Application of funds Fixed assets Gross block Less: Accumulated depreciation Net block Capital work in progress (including capital advances) Goodwill on consolidation Current assets, loans and advances Inventories Sundry debtors Cash and bank balances Loans and advances Less: Current liabilities and provisions Current liabiliies Provisions Net current assets

20

SS: Projected Cash Flow F2004 to F2009E (Rs. in million) FY04

FY05

FY06

FY07E

FY08E

FY09E

274.2 572.9 847.1 50.3

274.2 631.7 905.9 62.4

344.0 2,285.2 2,629.2 0.0

344.0 3,184.6 3528.5679 0.0

344.0 3,527.9 3871.8821 0.0

344.0 4,425.8 4769.7823 0.0

552.5 50.0 602.5 0.0 1,499.9

580.7 320.0 900.8 0.7 1,869.8

608.7 26.0 634.7 3.6 3,267.5

1411.4272

1935.941

1907.9129

4,940.0

5,807.8

6,677.7

1,192.6

1,442.1

1,866.2

-353.0 839.6

-459.2 982.9

-564.5 1,301.7

2873.925 878.17664 1995.7484

3987.675 1218.5019 2769.1731

4990.05 1524.7946 3465.2554

58.2 897.8 0.0

236.2 1,219.0 12.6

86.6 1,388.3 96.3

450.0 2,445.7 433.0

650.0 3,419.2 569.6

750.0 4,215.3 997.1

562.2 61.7 14.7 483.2 1,121.8

629.4 64.8 14.9 667.0 1,376.2

737.0 92.6 1,137.9 765.4 2,733.0

1170.202 135.05832 276 1781.2834 3362.5437

1701.5699 192.94153 18 2089.8211 4002.3326

2187.9162 245.92043 12 1826.9216 4272.7583

643.3 0.5 643.8 478.0

710.3 31.5 741.9 634.4

891.5 58.8 950.3 1,782.7

1267.7188 33.6 1,301.3 2,061.2

2126.9624 56.4 2,183.3 1,819.0

2734.8953 72.5 2,807.4 1,465.4

Miscellaneous expenditure Profit and loss account

8.7 115.4 1,499.9

3.8 0.0 1,869.8

0.0 0.0 3,267.4

0.0 0.0 4,940.0

0.0 0.0 5,807.8

0.0 0.0 6,677.7

Total Assets

2,019.6

2,595.3

4,121.3

5358.292

6771.5057

7738.0137

Sources of funds Shareholders' funds Share capital Reserves and surplus Minority interest Loan funds Secured loans Unsecured loans Deferred tax liability Application of funds Fixed assets Gross block Less: Accumulated depriciation Net block Capital work in progress (including capital advances) Goodwill on consolidation Current assets, loans and advances Inventories Sundry debtors Cash and bank balances Loans and advances Less: Current liabilities and provisions Current liabiliies Provisions Net current assets

21

SS: Ratio Analysis F2004 to F2009E

Liquidity ratios Current Ratio Quick Ratio Leverage ratios Long Term Debt-Equity Ratio Total Debt-Equity Ratio Debt-Asset Ratio Coverage Ratios Interest coverage ratio Debt service coverage ratio Turnover ratios Inventory turnover Accounts receivables turnover Total Assets turnover Profitability ratios Gross profit margin Operating profit margin Net profit margin Return on investment Return on networth Leverages Degree of financial leverage Sales Sales Growth (%) EBITDA EBITDA Growth (%) EBIT EBIT Growth (%) RONW Sales/Total assets Sales/Net fixed assets Debtor Turnover (days) Inventory turnover (days) Creditor turnover Total debt/equity EPS Number of shares Net worth BV/share FCFS P/E P/BV

FY04

FY05

FY06

FY07E

FY08E

FY09E

1.742 0.869

1.855 1.007

2.876 2.100

2.343 1.526

2.405 1.594

2.481 1.675

0.711 1.471 0.617

0.994 1.778 0.621

0.241 0.580 0.370

0.400 0.759 0.500

0.500 1.049 0.600

0.400 0.973 0.600

3.978 6.054

6.135 8.519

14.188 15.374

7.510 8.481

7.795 8.710

10.555 11.420

3.799 66.846 2.042

4.481 83.305 2.080

5.475 78.198 1.758

6.083 91.250 2.300

6.083 91.250 2.600

6.083 91.250 2.900

0.423 0.202 0.031 0.080 0.132

0.420 0.232 0.042 0.094 0.206

0.383 0.191 0.037 0.097 0.091

0.360 0.190 0.031 0.099 0.096

0.349 0.184 0.031 0.110 0.125

0.344 0.182 0.034 0.128 0.140

1.336 4123.090

1.195 5398.160 30.925 355.500 38.074 243.630 49.889 0.206 2.080 5.492 4.381 81.447 91.914 1.778 6.910 27.422 905.890 33.035 5.617 86.151 18.020

1.076 7243.490 34.184 564.650 58.833 398.830 63.703 0.091 1.758 5.565 4.668 66.666 80.635 0.580 7.270 34.383 2629.220 76.469 11.106 81.884 7.785

1.154 12324.072 70.140 805.182 42.598 572.394 43.518

1.147 17605.915 42.858 1137.905 41.323 814.903 42.368

1.105 22440.240 27.459 1491.607 31.084 1087.413 33.441

2.300 5.412 4.000 60.000 65.000 0.759 9.988 34.380 3528.568 102.634 9.676 59.599 5.800

2.600 5.474 4.000 60.000 75.000 1.049 14.225 34.380 3871.882 112.620 22.009 41.850 5.286

2.900 5.473 4.000 60.000 75.000 0.973 19.645 34.380 4769.782 138.737 27.200 30.303 4.291

257.470 162.540 0.132 2.042 4.911 5.460 96.071 109.926 1.471 4.360 27.422 847.100 30.891 4.521 136.537 19.271

22

Factor and Regression Analysis regression for area in square ft. constant(a) regression for revenue constant(a) regression for cost of goods sold constant(a) regression for employee costs constant(a) regression for operating and administrative exp constant(a) regression for total assets constant(a)

-494570

b

76288.483

-1294.623

b1

0.007041

-423.603

b

0.612

-20.979

b

0.06257

-243.129

b

80.836

-355.95

bf

111.375

b2

179.258

(Rs. in million) FY04 14 634647 8 4123.1

FY05 16 726045.728 8.5 5398.2

FY06 20 950701 8.3 7243.5

FY07E 29.00 1717796.01 8.50 12324.07

FY08E 39.00 2480680.84 8.00 17605.91

FY09E 48.00 3167277.18 8.00 22440.24

2,136.0

2,820.8

4,035.2

7118.73

10351.22

13309.82

241.6

311.2

436.2

750.14

1080.62

1383.11

Factor for increase of eployee costs due to competition Employee costs

1 241.58

1 311.24

1 436.22

1.02 765.14

1.02 1102.24

1.02 1410.77

Operating and administrative expenses Loan amount Interest Gross block

914.6 602.5 40.9 1,192.6

1,011.2 900.8 39.7 1,442.1

1,386.6 634.7 28.1 1,866.2

2101.12 1411.43 76.22 2873.93

2909.48 1935.94 104.54 3987.68

3637.00 1907.91 103.03 4990.05

No. of stores Area in sq. ft GDP Revenues Forecast of Cost of Goods sold Forecast of employee costs

23

Calculation of Risk Free Rate of Return (RF) We have taken the redemption yield on medium term GOI securities to calculate the risk free rate of return. Year

1995-96 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 RFR

Annual (gross) redemption yield of Government of India securities Medium term (5-15 years) 5.75-14.07 5.75-14.44 5.20-14.00 5.75-13.74 6.50-13.84 9.37-12.50 5.14-13.85 5.60-9.27 4.41-6.78 4.71-7.73 8.92

Year

S&P CNX Nifty

Average Mean Price 9.91 10.095 9.6 9.745 10.17 10.935 9.495 7.435 5.595 6.22

Calculation of Market Returns (RM) We have taken 10 year duration to calculate the market returns. Closing price of S&P CNX Nifty on 30 Sept of each year

Calculation of Beta

Returns (%)

Rmarkets, RSS Variance

2919.208824 0.03822395 88.89659052

Shopper's Stop 473.7235294 0.033257091 30.99892191 17.73109944

Covariance (S&P CNX Nifty,SS) Beta Calculation based on one years data Beta SS-S&P CNX Nifty

0.571990842

Dates: 23rd May 2005 to 17th Oct 2006

Calculation of Weighted Average Cost of Capital (WACC) RFR

8.9200 0.5720 9.2037

1996

936.27

1997

1123.8

20.0294787

Beta Risk premium

1998

904.95

-19.4741057

Cost of equity (ke)

14.1845

1999

1413.1

56.1522736

2000

1271.65

-10.0099073

2001

913.85

-28.1366728

2002

963.15

5.39475844

Cost of debt (kd) Tax rate 1-tax rate Post tax cost of debt (%) 6.12 WACC

9.0000 0.3200 0.6800 6.1200 12.7809

2003

1417.1

47.1318071

2004

1745.5

23.1740879

2005

2601.4

49.0346606

2006

3588.4

37.9411086

Mean returns

18.12374891

Target Debt/Equity Debt weightage Equity weightage

0.4000 0.285714 0.777778

Valuation Based on Three Stage FCFF Model Growth Rate High Growth Phase Declining Growth Phase

15% declining @ 3%

Stable Growth Phase

FCFF PV of future cash flows

FCFF PV of future cash flows

FCFF PV of future cash flows

FCFF PV of future cash flows

6%

Time Frame FY10-FY21

Duration 12

FY22-FY24 FY25 onwards

3 infinite

FY07 332.6559803

FY08 756.6724911

FY09 935.1392324

FY10 1075.410117

FY11 1236.721635

FY12 1422.22988

294.9576515

594.8899171

651.8824236

664.7088226

677.7875931

691.1237007

FY13 1635.56436

FY14 1880.899016

FY15 2163.033869

FY16 2487.488949

FY17 2860.612292

FY18 3289.704135

704.722209

718.5882802

732.7271796

747.1442752

761.8450407

776.8350575

FY19 8709.162776

FY20 10886.45347

FY21 13608.067

FY22 16238.96

FY23 18458.284

FY24 19934.947

1823.529169

2021.096542

2240.069

2370.2137

2388.8284

2287.5629

FY19 3783.159756

FY20 4350.633719

FY21 5003.2288

FY22 5603.6162

FY23 6107.9417

FY24 6474.4182

792.120017

807.7057224

823.59809

817.89525

790.47568

742.9485

Terminal Value PV of Terminal Value

101208.5956 11613.82725

PV of total cash flows Market value of debt FCFE

24405.78267 650 23755.78267

Target price per share

691.1778489

Sensitivity Analysis Terminal Growth rate

High growth rate 5

10

15

20

25

4

269.51 396.12 598.56

920.6

1428.9

5 6 7 8

281.89 297.92 319.5 350.1

990.84 1081.8 1204.2 1377.7

1548.4 1703.3 1911.7 2270.2

25

418.77 448.09 487.55 543.51

638.92 691.17 761.5 861.24