retail - tough times continue

8/14/2019 Retail - Tough Times Continue

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April 06, 2009 | Retail

RetailRESULT PREVIEW

Tough times continueWe expect our coverage universe of retail companies to report 14.34% YoYrevenue growth due to the expansion undertaken in the first three quartersof FY09. The EBITDA margin is expected to improve marginally by 30 bpsdue to the cost rationalisation measures undertaken by the companies. Thenet profit is expected to decline by 13.2% due to slowing sales and higherdebt taken for working capital requirements.

Highlights ofthe quarter

During the quarter, retailers offered huge discounts to lure consumers tothe stores and convert them into sales. Almost all the retailers announced aslowing of their expansion plans. They are in the process of closing theirunviable stores and are resizing the existing large stores to make themprofitable. They have also announced cost cutting strategies involvingcentralising of operations and renegotiating rentals with the malldevelopers. Franchise agreement was the most preferred route preferred bymajority retailers due to the asset-light model nature of business.

Broad sectoral outlook for Q3FY09EThe 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 isexpected 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 SummaryExhibit 1:Coverage Universe (Consolidated)

(Rs. Crore)

Sales (%) change EBIDTA (%) change PAT (%) change

Company JFM09 Y-o-Y Q-o-Q JFM09 Y-o-Y Q-o-Q JFM09 Y-o-Y Q-o-Q

Koutons Retail 497.54 34.00 105.80 88.80 24.40 103.95 37.95 6.72 184.97

Vishal Retail 291.05 -8.59 -18.12 34.60 -0.16 -20.99 1.95 -81.24 -9.43

Total 788.59 14.34 32.05 123.40 16.37 41.30 39.90 -13.18 157.90

Source: Company, ICICIdirect.com Research

ANALYSTS

Bharat [email protected]

Prerna [email protected] [email protected]

Price performance (%)1M 3M 6M 12M

Koutons 15.84 -12.10 -33.74 -42.29

Vishal 23.31 -63.87 -84.96 -95.11


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Koutons Retail (KOURET)

Koutons Retail India, a specialty discount company, operates throughKoutons and Charlie Outlaw outlets throughout the country. At the endof Q3FY09, the company had a network of 1424 outlets (including Koutonsand Charlie Outlaw outlets) across the country. The company follows anasset-light business model wherein 93% of stores are under franchiseagreement. It primarily caters to the mens apparel segment and is nowincreasing its offering to women and kids apparels, accessories andfootwear segments.

We expect Q4FY09 revenues to increase by 34.0% YoY to Rs 497.54crore primarily driven by space expansion undertaken during thefirst three quarters. The revenue per sq ft is expected to decline by12.49% due to the weak consumer sentiments with the ongoingeconomic slowdown

With the economic slowdown expected to continue for the next 12to18 months, consumer sentiments have further weakened. The

company, known for its discount retailing model, increased itsdiscounts in the quarter. It offered flat 80% discount on almost allthe products throughout the quarter to lure customers and survivein the tough macroeconomic scenario. As a result, the revenue persq ft is expected to decline by 12.49% YoY. We expect theoperating margin to decline to 17.8% in Q4FY09 from 19.2% in thecorresponding quarter of the previous year

We expect approximately 42% of annual FY09E revenues to bereported 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 13.5xits revised FY10E EPS of Rs 33.70. We are positive on the asset-lightmodel of the company and the value retail segment in which the

company operates. We maintain our target price at Rs 505 withPERFORMER rating

Exhibit 2:Quarterly Estimates(Rs. Crore)

Q4FY09E Q4FY08 Q3FY09 Y-o-Y (%) Q-o-Q (%) 9mFY09 FY09E

Sales 497.54 371.29 241.76 34.00 105.80 683.04 1180.58

EBIDTA 88.80 71.39 43.54 24.40 103.95 121.12 209.92

EBIDTA margin 17.85 19.23 18.01 17.73 17.78

Profit 37.95 35.56 13.32 6.72 184.97 43.73 81.68

Profit margin 7.63 9.58 5.51 6.40 6.92

EPS 12.40 11.62 4.35 6.72 184.97 14.29 26.69



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Vishal Retail (VISRET)

Vishal Retail Ltd, incorporated in 2001 by Ram Chandra Agarwal, is in thebusiness of value retailing with focus on Tier II and Tier III cities. Thecompany operates 182 stores with a retail space of 2.9 mn sq ft across thecountry. 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 hasset up two manufacturing facilities with a total capacity of 5000 pieces perday. To ensure strong logistics support, the company established 29warehouses in eight cities with a total space of 1.05 mn sq ft and a fleet oftrucks for transportation.

We expect Vishal Retail to report an 8.59% YoY decline in revenueon account of expected 31.8% YoY decline in revenue psf. Thecompany is going through a severe liquidity crunch whereininventory management is a key concern. Non-availability of rightproducts coupled with weak consumer sentiments is expected toresult in a decline in revenue for the quarter

We expect a 100 bps YoY increase in the EBIDTA margin onaccount of cost cutting measures adopted by the companyincluding centralisation of distribution system

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

At the current market price of Rs 40, the stock is trading at 3.4x itsFY10E earnings of Rs 11.62 per share. The company is undergoing asevere liquidity crunch and has almost halted its expansion plans forthe near term. In the current economic scenario, wherein the footfalls are reducing, consumer sentiments are weak and

consumers are postponing their discretionary requirements, webelieve the company will continue facing tough times for the nextcouple of quarters. We maintain our UNDERPERFORMER rating

Exhibit 3:Quarterly Estimates(Rs. Crore)

Q4FY09E Q4FY08 Q3FY09 Y-o-Y (%) Q-o-Q (%) 9mFY09 FY09E

Sales 291.05 318.41 355.45 -8.59 -18.12 1090.34 1381.39

EBIDTA 34.60 34.65 43.79 -0.16 -20.99 134.93 169.52

EBIDTA margin 11.89 10.88 12.32 12.37 12.27

Profit 1.95 10.40 2.15 -81.24 -9.43 20.27 22.22

Profit margin 0.67 3.27 0.61 1.86 1.61

EPS 0.87 4.64 0.96 -81.24 -9.42 9.05 9.92 Source: Company, ICICIdirect.com Research


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Coverage Universe Valuation table

M Cap

CMP TP Rating (Rs Cr.) FY08 FY09E FY10E FY08 FY09E FY10E FY08 FY09E FY10E FY08 FY09

Koutons (KOURET) 455 505 P 1,392 22.75 26.74 33.70 20.00 17.02 13.50 11.75 9.26 8.21 19.16 19.04

Vishal (VISRET) 40 46 UP 90 18.15 9.92 11.62 2.20 4.03 3.44 4.69 5.00 4.54 12.57 12.64

EPS P/E (x) EV/EBIDTA (x) ROCE



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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. currentmarket price and then categorises them as Outperformer, Performer, Hold andUnderperformer. The performance horizon is two years unless specified and the notional targetprice is defined as the analysts' valuation for a stock.

Outperformer (OP): 20% or more;Performer (P): Between 10% and20%;Hold (H): +10% return;Underperformer (UP): -10% or more;

Pankaj Pandey Head Research [email protected]

ICICIdirect.com Research Desk,ICICI Securities Limited,Gr. Floor, Mafatlal House,163, HT Parekh Marg,Backbay Reclamation

Churchgate,Mumbai 400 020

[email protected]

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retail - tough times continue

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