| Back on track | |
| Ram Prasad Sahu / Mumbai March 08, 2010, 0:35 IST | |
Volume and profitability growth in the December quarter is a sign of better times to come for the retail sector.
After a tough 2008-09 wherein they were burdened with heavy losses and falling demand, the organised retail sector has bounced back in the last few months. While debt is still a concern, recent fund raising by major players should help ease pressures on high working capital as well as interest payment obligations.
More importantly, there has been an improvement in profitability on the back of rising demand leading to healthier cash flows. This not only helps take care of operational expenditure, but critically, part fund expansion plans of leading players.
With signs of consumer demand coming back, expect the organised retail segment, which is pegged at $15 billion, to grow in double-digits and its share of the overall retail market to improve to about 9 per cent from the current 5 per cent over the next five years.
Retailers, who are on an expansion spree in tier 2 and tier 3 cities, should also see revenues rise 15-20 per cent overall and about 10 per cent on same store sales. We analyse the December quarter results of four listed retailers and what lies ahead for them.
Pantaloons Retail
The company has had a good quarter with revenues growing by 25 per cent. A large part of this was due to growth in same store sales (SSS) in its value and lifestyle retailing businesses, which grew by 7 per cent and 11 per cent to Rs 1,227 crore and Rs 472 crore, respectively.
Despite the revival in demand, SSS for home retailing business continues to be flat. Though a significant part of the volumes (over 70 per cent) comes from value retailing, the company has been increasing its share of lifestyle retailing which has moved up to 29 per cent from 27 per cent over the last one year. While volume growth helped improve Ebidta margins year-on-year by 30 basis points to 10.7 per cent, net margins were up 45 basis points on lower interest costs.
The company is likely to maintain its margins going ahead and will rely on volume growth to improve operational efficiencies. With the company adding about 5 million square feet of space a year and its existing stores doing well, expect revenues to grow by 20 per cent for year ending June 2011. At Rs 395, the stock is trading at 24.6 times its 2010-11 estimated EPS of Rs 16 and the upsides are priced in.
Shoppers’ Stop
Higher footfalls at its departmental stores, higher conversion and increased transaction size helped Shoppers’ Stop post an 11 per cent rise in topline in the December quarter. Cost rationalisation measures helped the company double its operating profits year-on-year to Rs 44 crore in the December quarter, resulting in a sharp rise in margins. Lower interest costs helped boost net profit to Rs 13.6 crore.
SSS, however, grew a marginal 2.1 per cent but an improvement in consumer demand in the fashion apparel industry should boost its SSS going ahead. The company raised Rs 31 crore through a warrant issue to promoters and is now planning to raise another Rs 130 crore through a QIP issue to increase its stake in Hypercity to 51 per cent from 19 per cent and for expansion.
With the company planning to add a million square feet over the next two years (about 18 new stores) expect SSS to improve to double-digit growth. Over the last one week, the stock has gained 10 per cent and at Rs 372, it is trading at an unattractive 27 times its 2010-11 estimated EPS of Rs 14.
Titan
Higher watch and jewellery volumes helped Titan Industries’ net sales grow 30 per cent year-on-year for the December quarter. While overall watch volumes grew 28 per cent to 2.35 million, volumes of its brands Titan, Sonata and Fastrack grew 25 per cent, 31 per cent and 33 per cent, respectively.
| MORE SHOPPERS, MORE PROFITS |
in Rs crore
Q3FY10 results |
Net
sales |
% chg
y-o-y |
Operating
profit |
% chg
y-o-y |
Net
profit |
% chg
y-o-y |
FY11E
P/E (x) |
| Pantaloon Retail |
1,912.0 |
25.4 |
203.0 |
29.0 |
51.0 |
51.1 |
24.7 |
| Shoppers' Stop |
393.0 |
11.3 |
44.0 |
105.0 |
14.0 |
2,620.0 |
26.6 |
| Trent |
155.0 |
22.6 |
26.0 |
160.9 |
16.0 |
170.2 |
128.2 |
| Titan |
1,333.0 |
30.2 |
107.0 |
50.7 |
78.0 |
86.2 |
25.6 |
| Koutons Retail |
269.0 |
11.6 |
49.0 |
13.0 |
16.0 |
18.6 |
9.6 |
| Provogue |
123.0 |
21.3 |
14.0 |
50.6 |
9.0 |
22.3 |
52.8 |
| E: As per earnings estimates Source: Company, Analyst reports |
While lower marketing and staff costs helped improve overall Ebidta margins by 100 basis points to 8 per cent, margins in the watch segment grew 260 basis points to 14.7 per cent due to higher volumes as well as richer sales mix of Titan and Fastrack watches.
Expect the company to end the year with double-digit sales growth for the watch division. The jewellery business grew nearly 34 per cent to Rs 1,050 crore with volumes turning positive after three quarters and registering a growth of 5 per cent.
A decline in prices of gold, especially in the second half of December, and the wedding season helped the volumes of this business. Volume growth across segments and the promotional activities in the current quarter is likely to help the company end the year with sales of about $1 billion. After touching its 52-week high, the stock is currently trading at 26 times its 2010-11 estimated EPS of Rs 70. Buy at dips with a long-term perspective.
| PROFIT MARGINS LOOKING UP |
in (%)
OPM margin trend |
FY09 |
FY10 |
| Q1 |
Q2 |
Q3 |
Q4 |
Q1 |
Q2 |
Q3 |
| Pantaloon Retail |
10.2 |
10.3 |
10.4 |
10.6 |
11.1 |
11.0 |
10.7 |
| Shoppers' Stop |
0.2 |
1.8 |
0.0 |
3.9 |
5.0 |
6.5 |
11.2 |
| Trent |
9.4 |
5.5 |
9.1 |
7.3 |
8.8 |
7.6 |
8.1 |
| Titan |
6.9 |
11.6 |
5.9 |
8.5 |
9.1 |
9.7 |
8.3 |
| Koutons Retail |
20.4 |
17.4 |
19.3 |
25.1 |
24.0 |
17.8 |
18.3 |
| Provogue |
22.8 |
14.1 |
16.3 |
27.0 |
22.6 |
15.7 |
16.4 |
| Source: CapitaLine Plus |
Koutons Retail
Higher volume growth helped the company record a 17 per cent year-on-year growth in net sales in the December quarter. SSS growth for its Koutons and Charlie Outlaw store formats were at 8 per cent. Ebidta improved 14 per cent to Rs 49 crore due to lower other expenditure and raw material costs, while margins were down nearly 100 basis points to 18.2 per cent due to sharp decline in other operating income. While the company added 14 stores in the quarter, it closed 49 unprofitable stores. For 2010-11, the company plans to add 200 stores to its existing tally of 1,400.
The company’s inventory levels, which are among the highest in the sector, have come down to Rs 684 crore from Rs 726 crore a year ago. The company, which has a debt of Rs 620 crore, has refinanced a fifth of this at lower rates which should help lower interest payments going ahead.
At Rs 348, the stock is trading at 9.4 times its 2010-11 estimated earnings of Rs 37. Although valuations look attractive as compared to others, it is partly due to the company’s franchise-oriented business model. Nevertheless, there is potential for the stock to deliver 15-20 per cent returns over a year.
|
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