Tuesday, April 21, 2009

India retail sector

What happened to India’s retail story?


  • The Indian retail sector is going through a rough patch currently. While falling
    real estate costs provide some relief, slowing same store sales growth and a
    capital crunch have impacted growth prospects and profitability.
  • We downgrade Shopper’s Stop to Underperform and prefer Pantaloon.


  • Same stores sales (SSS) growth under pressure: 4QCY08 SSS growth for
    the Indian retailers turned negative for the first time (Figure 1). Slowing growth
    and a high base effect (from the good ol’ days of 2007) impacted sales. The
    problem was sharper in the high-end products (lifestyle retail) versus items of
    daily consumption (value retail). Shopper’s Stop saw its SSS growth fall from
    16% in 1QCY08 to -4% in 4QCY08.
  • Pressure to continue in the near term: Macquarie expects India’s GDP
    growth to slow from 9.3% in FY3/08E to 5.5% in FY3/10E (Figure 2). We
    believe slower GDP growth is likely to drive SSS growth down to 8% for value
    retail and under 8% for lifestyle retail. Slower SSS growth is reflected in our
    revised estimates and is the basis of our preference for Pantaloon (~60%
    sales from value retail) over Shopper’s Stop (pure play on department stores).
  • Capital crunch: The credit crunch has also hit the sector hard with debt
    funding becoming difficult (and expensive) and no appetite for equity raisings.
    This has resulted in the companies having to curtail their (over) ambitious
    store roll out plans. Pantaloon’s operations can support growth of around 1m–
    2m sqf per year with limited external funding in our view. Shopper’s Stop, on
    the other hand, cannot do without external funds.
  • Outside probability of FDI in retail: Foreign direct investment is curtailed in
    the Indian retail sector. Once central government elections are complete in
    May 2009, we believe there is a 10% probability that FDI may be allowed in
    ‘multi-brand’ retail. This will allow foreign players to enter, who are likely to
    then pick up stakes in the incumbents (such as Pantaloon), providing funds
    for growth and expertise in managing large-format outlets and inventory.
  • Falling costs provide some relief: The last three years saw a sharp rise in
    retail rents due to supply-demand dynamics. With more supply coming
    through and a slowdown in store opening plans by most retailers, rents have
    started falling. We expect this to continue and average rents to fall at least
    another 25% over the next 12 months (we also cover the property sector).
    Employee costs are also under downward pressure.


  • We expect near-term profitability in the sector to remain under pressure.
    However, as discussed above, we expect Pantaloon to be able to tide over
    this tough period given its exposure to value retail and eventual capital
    raising. Shopper’s Stop, on the other hand, is likely to remain under pressure
    for at least the next three–four quarters.

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