Retailigence

“Club of Knowledge Hunters”

Retail stocks look promising

Posted by retailigence on January 5, 2009

It’s that time of the year when all retail companies start working for their end-of-season sale. Taking this spirit a little ahead, ET brings forth the discount biggies of the Indian retail industry, Vishal Retail and Koutons Retail. These stocks will suit all those investors who are looking for ‘value for money’ buys. Incidentally, both of them have a significant presence in the North

One-Year Beta 0.41

Institutional Holding 12.43%*

Current P/E 5.14

Current Mkt Cap Rs 226.45 cr

CMP Rs 106.15

*As on Sept ’08

Vishal Retail

Vishal Retail Ltd started in the year 1986 as discount retailer in Kolkata and is focused on tier II and III cities in the country. About 80% of the company’s stores are located in these cities. The company raised Rs 110 crore through its public issue in June’ 07.

BUSINESS:

Vishal Retail (VRL) is a value retailer with focus on apparels. Besides apparels it has a presence in a wide range of household merchandise and other consumer goods like footwear, toys, home furnishings to mobile phones, watches, toiletries, and grocery items.VRL’s outlets sell over 70,000 products, which meet all household requirements.

The company has focused on the lower middleincome group as its customers and the strategy has served its well so far. To increase its penetration the company has also experimented with small formats and it also plans to re-size around 25 of its stores. They have also opened restaurants within their stores to gain a higher share of customer’s wallet. As of now the company has 181 retail stores across 107 cities covering a total area of 2.98 million sq feet. VRL has an edge over peers with its focused business model operating largely through hypermart format. Thus it helps to being in economies of scale for sourcing raw materials and pass on the benefits to consumers. The company’s focus continues to remain on Tier II and Tier III.

It also has an apparel-manufacturing unit in Gurgaon and Dehradun. The company has 29 warehouses located in 8 key cities in India covering over 1.05 lakh sq ft area. The company manufactures about 9% of its requirement for apparels in its existing facility. Currently the company is consolidating its existing store count and has kept its expansion plans on hold.

FINANCIALS:

The sales have grown at a CAGR of 62% from Rs 147 crore in FY05 to Rs 1013 crore in FY08. Net profit also has grown at a CAGR of 91.7% from Rs 3.1 crore to Rs 40.6 crore during the period. Though the company did witness a slowdown in sales in the Sept’ 08 quarter, the revenue mix saw a shift towards non-apparels . The company has made a conscious effort of shifting towards non-apparels and staples.

Apparel share declined to 57% in second quarter compared to 62% in first quarter. In comparison, revenues from FMCG and other non- apparel goods rose to 24.1% (19.7%) and 18.2% (16.7%) respectively . This has a positive impact on the margins. The company is gradually increasing share of its private label in every category. This will further boost margins. However, the company has not been insulated from the slowdown in the overall consumption spend. Moreover delay in delivery of stores has resulted in very high inventory. This has resulted in the need for working capital funding , which has resulted in higher interest outflows . This has become a major concern for them.

GROWTH DRIVERS:

The company expects to continue its 40-50 % sales growth in the coming future. The company earns around 5-7 % of its operating profit from its private label products. Going forward, the company is looking at further increasing share of this high margin segment to drive growth and maintain EBITDA margins at around 12%. The overall share of private label is expected to increase from the current 18% in FY08 to 25% by end of March 2011.

The company has adopted the franchisee model for future store expansion. This would help to curb its operating costs as well.

OUR TAKE:

Besides the delay in store completion and increasing financing costs, the company will have to cope with declining sales growth in the coming times. The stock has been beaten down badly in this market crash and its rising debt levels are a concern, yet its business model makes it a good portfolio stock.
One-Year Beta 0.16
Institutional Holding 30.13*

Current P/E 20.24

Current Mkt Cap Rs 1,583.17cr

CMP Rs 516.25

*As on Sept ’08

Koutons

Delhi based Koutons Retail has shown tremendous growth post it’s listing in 2007. The company operates in the fashion wear apparel segment category. However it has now expanded its product merchandise to become a complete ‘family shop’ .

BUSINESS:

Incorporated in 1994, Koutons is an integrated apparel manufacturing & retail company. It is in the business of designing, manufacturing & retailing apparel under the “Koutons” & “Charlie Outlaw” brands.

They have a network of 1420 exclusive brand outlets across India. The company has positioned the “Koutons” brand in the middle to high fashion segment ranging from formal to party wear. The company had reinvented & re-launched their old premier brand “Charlie” as “Charlie Outlaw” . It forayed into women wear with Les Femme and kids segment with its Koutons Junior brand. As of September 2008, Les Femme contributed 6% of the revenue, & Koutons Junior contributed 5% of the revenue and the Men’s segment contributed 89% of the revenue.

The company increased number of stores from 1,175 in FY08 to a little over 1300 stores as of now. It is looking to expand the store count to 1,800 in FY09. This will entail expansion of space from 1.20 million square feet as on September ’08 to 1.5 million square feet in FY09. It targets to open 100 exclusive stores of each in FY09.

The company has already forayed into footwear. It would also introduce men’s accessories like innerwear, women’s accessories like handbags and kids’ accessories. This will help in maximizing the overall sales per square foot for its stores. Its acquisition of Upper Class range of womens’ wear marks its entry into the premium segment. Its presence in the West Asia will also help Koutons make an entry into this region . The average sale per sq ft for Koutons is about Rs 12,000 and for Charlie it is Rs 8,000.

FINANCIALS:

The sales have grown at a CAGR of 69.4% from Rs 96.3 crore in FY05 to Rs. 793.5 crore in FY08. Net profit during the period grew at a CAGR of 142 % from Rs 1.9 crore to Rs 67 crore. It’s operating margins have been hovering between 15-20 %. But with the slowdown in the economy in the recent quarters, operating profits have shrunk by about 200-300 basis points. Despite this, the company has some of the best net profit margins ranging between 5-7 %. New product launches as well as new line of business have helped to maintain the overall growth of the company. KRIL has been rolling out stores aggressively since the last two years and is looking at a pan India presence.

GROWTH DRIVERS:

The company has been doubling in size compared to about 40-50 % YoY growth reported by other retailers. However it cannot be directly compared to other players because its format and business model does not permit so. The company will be able to maintain its high profit margins as it’s offering is attractively priced.

Their franchisee model relieves them of the burgeoning rental costs, which are eating into retail margins. But the aggressive expansion has resulted in blockage of funds in inventory. This has forced the company to go for working capital funding. Larger volumes would bring in economies of scale thus further reducing cost.

The company has been making a conscious effort of not rapidly opening new stores but rather expanding the existing stores.

Foray into women wear and kids wear will drive company’s growth in future. Kids segment requires quick replenishment as the child outgrows its outfits within six months-thus providing huge sales potential. The company also plans to foray into West Asia and China.

OUR TAKE:

For the company that believes in providing fashion and quality at affordable prices, going ahead with rapid store roll out could be a big challenge. Nonetheless, we believe economies of large scale could help the company in stabilizing its operating costs and sustaining the current slowdown.

Sources Economic Times

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