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Pantaloon Retail India Ltd

Big Gains from Big Bazaar

AnalystToral Munshi +(91 22) 5540 8651([email protected])Dealing(+91 22)2685 0505Sandeepa Arora 5540 9033Biren Patel 5540 8601

November 2003

Organized Retail to grow from a mere 2% of retail trade to 5% by 2005.Players able to expand size and scale at a fast pace and manage the supplychain efficiently would be best positioned to capture the growth.Pantaloon with its foray through the hypermarket format has emerged asthe fastest growing organized retailer in the countryScalability of the hypermarket format will drive growth and economies ofscale; while high share of apparel business will support high profitability.We expect Pantaloon Retail’s sales to grow at a CAGR of 47% and netprofit at a CAGR of 87% over the next two years. The current marketprice of Rs255 discounts F6/05E EPS of Rs19 by 13.4x. We recommend aBUY on the stock with a target price of Rs475.

November 21, 2003 2

COMPANY RESEARCH

Pantaloon Retail India Ltd: Big Gains from Big Bazaar

Share Holding Pattern %Promoters 36Institutional Investors 15Other Investors 9General Public 40

Share Price Chart

RecommendationBUY

CMP Rs25552 week H/L Rs.297/42Market Cap Rs 4.6bn

Pantaloon Retail India Ltd (PRIL) has emerged as the leading retailer in Indiawith its chain of Pantaloon, Big Bazaar and Food Bazaar stores. With the rightmix of management capabilities, high growth product profile, well-developedstrategy and extensive IT and logistics capabilities, PRIL has ensured rapidgrowth. More importantly, while most organized retailers are struggling to be inblack, PRIL has demonstrated a consistent track record of profitable growth. Werecommend a BUY at the current market price of Rs255

Investment Rationale

Fastest growing player in Indian Retail sectorFrom a small beginning with its entry into apparel retailing, PRIL has today evolved asa leading manufacturer-retailer in the country with 13 Pantaloon departmental stores,6 Big Bazaar hypermarket discount stores and 6 Food Bazaar food and grocery stores.‘Pantaloons’, ‘Big Bazaar’ and ‘Food Bazaar’ together account for over 650,000sq.ft of retail space in the country today.

Op. date F6/04 F6/05

PANTALOONSBaroda Aug-03 23000Mumbai-Vashi Aug-03 22000Mumbai - Centaur, Juhu Dec-04 20000Noida Dec-04 30000Total - Pantaloons 45000 50000BIG BAZAARNagpur Sep-03 54000Delhi - Sahara Sep-03 9000Ahmedabad Oct-03 65000Kolkata - 3 Dec-03 60000Bhubeneshwar Dec-03 30000Mumbai - Kandivli Jul-04 70000Kolkata - 2 Jul-04 30000Lucknow Aug-04 75000Mumbai - Centaur, Juhu Dec-04 40000Mumbai - Goregaon Dec-04 75000Noida Dec-04 100000Total Big Bazaar 218000 390000FOOD BAZAARMumbai-Vashi Jul-03 9000Kolkata - 2 Dec-03 7500Total Food Bazaar 16500CENTRALBangalore Dec-03 100000Hyderabad Jun-05 240000Total Central 100000 240000TOTAL SPACE SIGNED 379500 680000

Exhibit:1 Rollout Plan for the next two years

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COMPANY RESEARCH


PRIL has chalked out an aggressive expansion plan to increase its retail space to over1,740,000 sq.ft. over the next two years. Space for additional 4 Pantaloon’s, 11 BigBazaars and 2 Food Bazaar’s has already been finalized, and these would beoperational over the next two years. PRIL aims to set up over 30 Food Bazaar’s andis scouting for appropriate locations for the same.

After popularizing the concept of hypermarket in India, PRIL is now also setting up anew format shopping mall in the country under the name ‘Central’. The format wouldbe on the lines of a Selfridhes in London or a Central Mall in Bangkok. Two malls of100,000 and 240,000 sq.ft. are being set up in Bangalore and Hyderabad respectively.The Central Mall at Bangalore is slated to open in December 2003.

Diversity of product range will ensure profitable volume growthTo achieve better return on retail space, PRIL uses certain product categories asmargin managers and certain product categories to generate traffic. The food andgroceries business will act as key volume growth driver while high share of apparel(which account for over 80% sales in Pantaloon Stores and 40% in Big Bazaar) willenable PRIL to maintain high margins. The management has demonstrated its abilityto improve stock turnovers in both the formats successfully, which has enabled significantmargin improvement. PBIT margins of Pantaloon Stores improved from 14% to inF6/02 to 19.5% in F6/03 while that of Big Bazaar improved from 6.5% in F6/02 to7.9% in F6/03.

Fully integrated value chain and own labels give competitive edgePRIL has a completely integrated value chain in apparels from fabric manufacturing toapparel manufacturing, branding, distribution to retailing. The company controls thetotal value chain from yarn to apparel retailing that gives a competitive edge in termsof speed of delivery, lower inventory carrying costs and better realizations

Exhibit 2: Value Chain Captured by PRIL

Source: Company

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COMPANY RESEARCH


Also, large part of PRIL’s apparel revenues comes from own private labels. PRILhas developed significant competencies in apparel branding over a period of timeand has developed own labels (John Miller, Shrishti, Bare, Annabelle, AFL) in all theapparel product categories. Worldwide, private labels give higher margin to retailersthan the national brands. Also growth of private labels is faster as retailer controlsshelf space and visibility. Other initiatives such as faster turnover of stocks byintroducing 6 seasons in a year (against 2 earlier) has helped in bringing down inventorylevels and at the same time providing wider choice to customer and improvingfrequency of customer visits.

High scalability of business model – multiplier effect will set inSize and scale drive economies on procurement and lower logistics costs, whichenables a retailer to deliver better value to customers. The hyper-market format hasmuch higher scalability as compared to the pure apparel retailing format. Also, thepotential to expand and scale is virtually unlimited in the food & grocery segment,where efficiencies improve dramatically with scale as the multiplier effect sets in.Food constitutes the largest expenditure item (estimated at over 50%) of an averageIndian’s monthly personal expenditure. However, the share of modern retail formatsin the Rs6700bn Food & Grocery market is a minuscule 0.3%, revealing the highgrowth potential in the segment.

Exhibit3: Share of organized retail in various segmentsSegment % of sales through organized retail chainsFootwear 22.2%Apparel 8.1%Jewellery /Watches 6.9%Books, Music, Gifts 6.7%Consumer Durables 4.2%Pharmacy 2.7%Home Furnishings 1.9%Food & Grocery 0.3%

Source : Industry

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COMPANY RESEARCH


New product categories and innovative tie-ups to aid growthPRIL offers large number of products to the customer to give them better choice forselection. Different product categories have different depth and width in merchandiseoffering. Besides, PRIL has tied up with Shop-in-Shop partners in its Big Bazaarstores. Some product categories where the company does not have core competencyor does not want to invest, but would attract customers are catered through thesepartners. Eventually, in the long run, the Company may manage some of these productcategories on its own as volumes grow and it develops competencies in these businesses.Shop-in-Shop partners typically pay a fixed rental for their space and share a part oftheir profits. By expanding the range of product offerings and retail formats, PRILtoday has been able to target a much larger share of the consumer’s basket (about70% as against less than 8% in 1994).

PRIL will be adding new product categories to its business in both Pantaloons as wellas Big Bazaar stores. Gold, Investment products, White goods and Appliances,Footwear will be the new product categories that will be added. These product categorieswill help in improving Walk In’s into its stores and generate additional business fromthe existing categories too.

Exhibit 4: Improving share in Customers Purchase Basket

Source: Company

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COMPANY RESEARCH


Constant capital infusion essential to maintain growth momentumThe discount format of hypermarket is based on the basic premise of high volumescompensating for lower margins. PRIL would need to undertake constant expansionto reach the size and scale at which global retailers operate to reap similar economiesof scale. The expansion plan chalked out over the next two years would entail capitalinvestments of over Rs1bn, and additional working capital requirement of Rs500mn.This would be funded through a mix of equity, debt and internal accruals. The highcapital investment would restrain ROCE and RONW growth, despite sharpimprovement in profitability. Also the management would continue to follow aconservative dividend policy to preserve earnings for growth.

Competition from global players would pose a major threatMost global retailing majors have been keen on entering into the huge untapped Indianmarket. However policy restricts Direct Foreign Investment in the sector. There is ahigh likelihood of the Government lifting restriction on FDI into the retail sector in thenear future. Entry of these foreign giants - with significant experience and skills in retailmanagement would increase competition for PRIL. However, we believe that giventhe widely dispersed and heterogeneous nature of Indian markets, a foreign entrantwould find it extremely difficult to establish a national presence. Pantaloon with its earlymover advantage and understanding of local markets is well entrenched to retain highcustomer share.

Concerns

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COMPANY RESEARCH


Pantaloon Retail (India) Limited (PRIL) was incorporated on October 12, 1987 asManz Wear Private Limited under the stewardship of Mr. Kishore Biyani. It wasconverted into a public limited company in September, 1991. The company sold brandedgarments under Pantaloon, Bare and John Miller brands. PRIL set up its first menswearPantaloon Shoppe outlet in 1993. The company’s name was changed to PantaloonRetail (India) Limited in 1999, when it made a full fledged entry into the retail segmentthrough the Pantaloons Family Store.

In the last 5 years PRIL has evolved as a leading manufacturer-retailer in the countrywith 13 Pantaloon departmental stores, 6 Big Bazaar hypermarket discount storesand 6 Food Bazaar - food and grocery stores. ‘Pantaloons’, ‘Big Bazaar’ and ‘FoodBazaar’ together account for close to 650,000 sq.ft of retail space in the country.

Pantaloons department stores have been positioned as ‘India’s family store’ offeringa wide range of garments, accessories and life style products. Pantaloons targets middleand upper middle class urban population in India.

Big Bazaar hypermarket discount stores have been positioned as ‘Is se sasta auracha kahin nahi!’ - with price as the key value proposition. Products are cheaper thanmarket price by 5%-60%. Apparels are normally cheaper by 25% to 60% than theprevailing market prices, while other product categories are cheaper by 5% to 20%.

Food Bazaar – Food Bazaar represents the company’s entry into food retail and istargeted across all classes of population. Food Bazaar replicates a local ‘mandi’, toprovide the much important ‘touch & feel’ factor which Indian housewives are used toin the local bazaar. Food Bazaar has over 50,000 stock keeping units which covergrocery, FMCG products, milk products, juices, tea, sugar, pulses, masalas, rice wheatetc, besides fruits and vegetables. All products are sold below MRP and discountsrange between 2% to 20%. Fruits and vegetables are sold at prices comparable towholesale prices.

Gold bazaar - The company entered the Rs400bn gold market by launching GoldBazaar as part of Big Bazaar. Gold Bazaar is managed by Mumbai-based ChintamaniJewellers in a profit sharing arrangement. The Gold Bazaar brand is owned by PRIL.Gold Bazaar aims to attract customers by offering customer 100% purity, 100% weightexchange policy, insurance against theft, fixed making charges and cash back guarantee.

Company Background

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COMPANY RESEARCH


PRIL has drawn up an aggressive expansion plan over the next two years. An estimated380,000 sq ft of additional retail space would be operational in F6/04 and another680,000 sq.ft. by F6/05. The company has already identified and signed up space for11 Big Bazaars, 2 Food Bazaar’s, 4 Pantaloon’s, and 2 Central Malls. PRIL has alsocreated the requisite backend infrastructure necessary for expansion of its operationsnationally.

Warehouse - PRIL has a Central Warehouse at MIDC Tarapur. The warehouse iscreated into modular fashion wherein first phase of 25,000 square feet is operational.There is a provision for additional warehousing space to make it four-fold in the futureas and when expansion need arises.The company has zonal warehouses at Mumbai,Kolkata, Hyderabad and Chennai to fulfill the demand of their respective regions. Thezonal warehouses are of 10,000-15,000 square feet each.

Manufacturing facilities - The company has one of the most modern trousersmanufacturing plant in the country. The trouser plant located at MIDC Tarapur in thesame premises of Central Warehouse. It employs more than 185 people and machinestrength of 156 machines. The plant was setup with technical know how from Bellows,U.K. with completely automatic and the most modern machines for fusing, serging,bottom hemming, welt pocket making operations. This factory has an installed capacityto manufacture 1400pcs trousers a day.The company also has its own plant to manufacture Denim jeans at Mumbai. The planthas an installed capacity to manufacture 700 jeans per day; it has been setup with bestmachinery from Durkopp Adler, Germany, Juki, Japan, Brother, Japan, Union Special,and U.S.A amongst others. The factory employs more than 60 people.

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COMPANY RESEARCH


Financial PerformanceYear to (Rs m) 06/01 06/02 06/03 06/04P 06/05PNet Sales 1766 2754 4414 6772 9519% yoy 56.0 60.3 53.4 40.6Net profit 64 70 114 244 400% yoy 9.8 62.3 113.6 64.1EPS 4.8 4.1 6.3 12.7 19.0% yoy (15.6) 54.6 103.0 49.2Equity 133 173 182 191 210Capital employed 2234 2815 3309 3896 4761Operating profit(%) 8.1 8.1 8.5 8.7 9.1RONW (%) 4.2 4.1 6.6 11.2 14.4ROCE (%) 6.0 6.7 9.7 13.0 15.4ROCE – Excl brand value (%) 12.7 11.6 15.1 18.7 20.5Debt-Equity (x) 0.5 0.6 0.8 0.8 0.7Book Value 115.4 99.1 101.9 114.1 131.8P/BV (x) 2.2 2.6 2.5 2.2 1.9P/E (x) 40.7 20.0 13.4

Profit & Loss Account

06/01 06/02 06/03 06/04P 06/05PNet sales 1766 2754 4414 6772 9519Other income 7 9 11 14 16Total income 1773 2764 4425 6786 9535Cost of Goods sold (1177) (1861) (3026) (4632) (6497)Power & Fuel Cost (20) (53) (79) (122) (171)Rent (62) (100) (157) (244) (343)Repairs & Maintenance (5) (11) (15) (24) (38)Employee costs (68) (136) (191) (305) (428)Advertisement & Branding (69) (99) (131) (196) (267)Commission (45) (71) (81) (122) (171)Transportation & Handling (17) (27) (44) (68) (95)Other expenses (159) (173) (317) (467) (647)Cost of sales (1623) (2531) (4040) (6180) (8658)PBIDT 150 232 385 606 877Interest (65) (115) (180) (210) (244)PBDT 85 117 205 396 633Depreciation (16) (42) (64) (98) (143)Profit before tax 69 75 142 297 491Provision for tax (5) (5) (20) (53) (91)Profit after tax 64 70 122 244 400Extra ordinary /P.Y.A. (0) (0) (8) 0 0Adjusted PAT 64 70 114 244 400

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COMPANY RESEARCH


Balance Sheet (Rs mn)

06/01 06/02 06/03 06/04P 06/05PEquity capital 133 173 182 191 210Share premium 148 234 269 366 561Capital Reserve 1060 1060 1060 1060 1060Profit & loss/general reserve 196 249 343 565 942Net worth 1538 1717 1854 2183 2773Secured loans 682 1095 1413 1663 1933Unsecured loans 14 3 42 50 55Total debt 696 1098 1455 1713 1988Capital employed 2234 2815 3309 3896 4761

Gross block 1589 1954 2407 2957 3517Accumulated depreciation (52) (94) (157) (255) (398)Net block 1537 1860 2250 2702 3119Capital WIP 79 63 33 35 50Total fixed assets 1616 1923 2283 2737 3169Investments 51 51 53 53 53Inventories 563 874 1144 1623 2165Sundry debtors 130 177 223 332 468Cash & bank 24 40 81 100 140Loans & advances 111 233 230 136 202Acceptances (72) (149) (328) (557) (730)Sundry creditors (137) (238) (194) (278) (391)Other liabilities (48) (71) (114) (140) (155)Provision for tax (8) (8) (17) (45) (77)Provision for dividend 0 0 (21) (21) (24)Other provisions (2) (4) (7) (8) (9)Working capital 560 854 997 1143 1588Miscellaneous expenses 8 6 5 4 3Deferred tax asset/(liability) 0 (18) (29) (40) (51)Capital deployed 2234 2815 3309 3896 4761


COMPANY RESEARCH


Cash Flow Statement (Rs mn)

Cash Flow 06/02 06/03 06/04P 06/05PPre tax income from operations 66.2 130.5 283.7 474.6Depreciation 42.2 63.5 98.5 142.8Expenses (deferred)/written off 1.3 1.0 1.2 1.2Other income/prior period adj 9.0 3.3 13.5 16.0Tax (4.9) (19.8) (53.5) (90.8)Cash profits 113.7 178.6 343.4 543.8

(Inc)/Dec in working capital -Sundry debtors (47.1) (46.4) (109.1) (135.3) -Inventories (310.8) (269.7) (479.6) (541.1) -other current assets 0.0 0.0 0.0 0.0 -Sundry creditors 178.0 134.5 312.7 286.5 -Others 25.4 74.5 56.6 50.3Net trade working capital (154.6) (107.1) (219.4) (339.7)

Operating activities (40.8) 71.5 123.9 204.2

(Inc)/Dec in fixed assets (349.1) (424.2) (551.7) (575.0)(Inc)/Dec in Investments (0.0) (1.9) 0.0 0.0(Inc)/Dec in loans & advances (122.4) 3.8 93.1 (65.2)(Inc)/Dec in deferred tax asset/liabilities 17.9 11.3 11.0 11.0

Investing activities (453.6) (411.1) (447.6) (629.2)- - - -

Inc/(Dec) in debt 401.9 357.2 257.7 275.0Inc/(Dec) in equity/premium 126.0 43.3 106.7 213.5Direct add/(red) to reserves-spl.item (16.9) (0.0) 0.0 0.0Dividends 0.0 (20.5) (21.4) (23.6)

Financing activities 510.9 380.0 342.9 465.0

Cash generated/(utilised) 16.5 40.4 19.3 40.0Cash at start of the year 23.8 40.3 80.7 100.0

Cash at end of the year 40.3 80.7 100.0 140.0


COMPANY RESEARCH


Key Ratios

06/01 06/02 06/03 06/04P 06/05PProfitability ratios (%)PBIDT 8.1 8.1 8.5 8.7 9.1PBDT 4.8 4.3 4.6 5.8 6.7PBT 3.9 2.7 3.2 4.4 5.2PAT 3.6 2.6 2.8 3.6 4.2Growth ratios (% YoY)Net sales 56.0 60.3 53.4 40.6PBIDT 54.4 65.8 57.4 44.8PBT 9.2 88.1 109.9 65.1Adjusted PAT 9.8 62.3 113.6 64.1Payout ratios (%)Tax (% of PBT) 6.5 6.5 14.0 18.0 18.5Dividend (% of PAT) 0.0 0.0 18.0 8.8 5.9Turnover ratios (x)Total assets 0.8 1.0 1.3 1.7 2.0Fixed assets 1.1 1.4 1.9 2.5 3.0Working capital turnover 3.2 3.2 4.4 5.9 6.0Inventory turnover 3.1 3.2 3.9 4.2 4.4Debtor turnover 13.6 15.5 19.6 20.3 20.3Liquidity ratios (x)Current ratio 3.1 2.8 2.5 2.1 2.2Debt equity ratio 0.5 0.6 0.8 0.8 0.7Interest cover 2.1 1.7 1.8 2.4 3.0Return Ratios (%)RONW 4.2 4.1 6.6 11.2 14.4ROCE 6.0 6.7 9.7 13.0 15.4ROCE (Excluding Brand value) 12.7 11.6 15.1 18.7 20.5Per share (Rs)Net earnings (EPS) 4.8 4.1 6.3 12.7 19.0Cash earnings (CPS) 6.1 6.5 10.2 17.9 25.8Dividend (DPS) 0.0 0.0 1.0 1.0 1.0Net book value (NAV) 115.4 99.1 101.9 114.1 131.8Asset composition (%)Net fixed assets 72.6 68.4 69.1 70.3 66.6Investments 2.3 1.8 1.6 1.4 1.1Working capital 25.2 30.4 30.2 29.4 33.4


COMPANY RESEARCH


Quarterly Performance (Q1 F6/04) (Rs mn)

Period to 09/03 09/02 Growth 06/03 06/03 GrowthRs mn (3) (3) % (12) (12) %Net Sales 1384.0 895.5 54.6 4448.3 2852.9 55.9Other income 2.3 1.5 59.0 7.9 6.7 17.6Operating profit 124.6 77.9 59.8 381.8 229.8 66.1Interest (45.4) (42.9) 5.9 (176.7) (112.4) 57.2Depreciation (20.1) (13.0) 54.9 (63.5) (42.2) 50.7Tax (10.1) (6.7) 50.9 (19.7) (4.9) 301.6PAT 49.0 15.4 218.0 121.9 70.4 73.3APAT 49.0 15.4 218.0 114.1 70.3 62.4OPM (%) 8.8 8.5 8.4 7.8Equity 181.8 181.8 - 181.8 173.2 -EPS (Rs) 10.8 3.4 - 6.3 4.1 -

Total retail sales registered a 60% yoy growth in Q1 F6/04 to Rs1.07bn driven by23% growth in Pantaloons to Rs502mn and a 118% yoy growth in Big Bazaar chain toRs568mn.Contribution of Big Bazaar to overall sales and profitability has been rising. Turnovercontribution from Big Bazaar has risen from 29% in Q1 F6/03 to 41% in Q1 F6/04,while that of Pantaloon chain has declined from 45% to 36% during the same period.Profit contribution of Big Bazaar has also improved rising from 17% of EBIT in Q1F6/03 to 33% of EBIT in Q1 F6/04.

Sales (Rs mn) Growth% yoy % sales contribution % Profit contributionBig Baazar 568 118 41 33Pantaloon 502 23 36 67Others 318 31 23 0

1388 53 100 100

Operating margins have registered a 30 basis point improvement from 8.5% in Q1 F6/03 to 8.8% in Q1 F6/04. Operating profit has grown by 59.8% yoy to Rs125mn.There has been a margin improvement in both the chain formats driven largely bysubstantial improvement in supply chain and inventory management.

Q1 F6/04 Q1 F6/03Big Baazar 7.9 5.8Pantaloon 18.4 17.8


COMPANY RESEARCH


The Retail SectorRetailing, with total sales of $6.6 trillion, is the world’s largest private service industry.Over 50 of Fortune 500 companies, and around 25 of the Asian top 200 companies,are retailers. The industry accounts for over 8%of the GDP in the Western economies.Retail is also one of the world’s largest employers, accounting for 16% of the USworkforce.

Industry

Trends in International Retail IndustryRetailing has shifted from small to large format storesLarge stores offering one-stop shopping convenience, better shopping ambience andwider assortments have gained acceptance across the world. Consumers tend to favorretailers that offer either cost advantages or superior service – large formats can deliverboth. As a result, stores have gotten bigger and offer better customer appeal, but atthe same time, have achieved better sales per unit area, thus improving profitability.

Market is concentrated in the hands of a few retailersCompelling economics of consolidation has driven expansion of retail chains- leadingto increasing concentration of the market with a few players. Interestingly, across theworld it is the first mover and the local retailer that has gained maximum market shareand mind share of the consumer. While some large retailers (Wal-Mart, Carrefouretc.) are expanding globally, yet local chains continue to be dominant players.

Source : Mckinsey


COMPANY RESEARCH


Exhibit 5: Top Ten Retailers in US by SalesName Sales No of Employees Mkt Capitalization

US$ mn1 Wal-Mart Stores, Inc. 251,372 1,400,000 255,2492 Target Corporation 45,561 306,000 35,3993 Sears, Roebuck & Co. 41,388 289,000 13,4784 J.C. Penney Company, Inc. 32,227 228,000 6,3045 Kmart Holding Corporation 27,437 212,000 2,6536 Coles Myer Ltd. 19,135 164,272 6,5417 Federated Department Str. 15,221 113,000 8,8888 The May Department Stores 13,238 55,000 8,4339 Kohl’s Corporation 9,654 19,000 17,62210 Dillard’s, Inc. 8,046 55,208 1,285Source: Yahoo Finance

Focus on technology to reduce cost and improve efficiencyRetailing efficiency is derived from effective sourcing, economies of scale andimplementation of logistical best practices through extensive deployment of InformationTechnology. Large chain retailers like Wal-Mart are able to manage increasingcomplexities of multiple location presence while achieving scale economies only due toextensive investments in IT and logistics.

Growth of Private LabelPrivate label of the retail stores are growing much faster than national manufacturersbrands. Store labels help boost profitability while delivering lower prices to customers.Internationally leading chains derive 30-40% of sales from private labels.


COMPANY RESEARCH


Organized Retail in IndiaIndia has a huge retail market of around 10 million retail stores. The market size iscurrently estimated at about US$200bn per annum accounting for 10-11% of India’sGDP. The retail sector generates 6% of total employment in India.

Retailing in India is highly fragmentedHowever retailing in India is highly fragmented and is dominated by the unorganizedsector consisting of small individual proprietor stores. The average size of a retailoutlet in India is less than 500 sq ft, reflective of the exceptionally fragmented nature ofthe industry in the country. Only 2% of retail sales in India flow through modern formatssuch as the supermarkets and specialty chains. Less than 1% of food and 8% of non-food categories, such as apparel, watches and Jewellery, are sold through departmentstores or specialty chains. The traditional formats still dominate accounting for 98% ofretail.


COMPANY RESEARCH


Huge growth potentialIndia trails way behind the world average in terms of per capita retail sales (US$220 in2000 as compared to the world average of US$ 1,150), reflecting the huge potentialof the sector. The retail market itself is expected to witness an exponential growth withrising income levels. There is also a huge potential for expansion of organized retail,which currently accounts for a minuscule US$4bn of the US$200bn Indian retail market.The share of the organized pie is expected to double over the next few years.

Key factors that will drive growth of organized retailing:

• Rising Urbanization• Higher disposable incomes• Growing consumerism• Nucleus family structure• Growing number of educated and employed women population• Media proliferation and rising awareness level• Brand profusion

Exhibit 6: Share of organized retailing in various segmentsEstimated Share of Branded Share of

mkt size (Rs bn) Organized RetailFood & Grocery 6,700 3.9% 0.3%Apparel 620 20.2% 8.1%Durables 360 51.4% 4.2%Jewellery /Watches 360 13.9% 6.9%Home Furnishings 260 3.8% 1.9%Beauty Care 185 18.9% 0.0%Pharmacy 185 94.6% 2.7%Footwear 90 38.9% 22.2%Books, Music, Gifts 75 46.7% 6.7%

Food & Groceries is the largest item of consumption in the Indian Consumer’s privateconsumption expenditure, accounting for almost 50% of his share of wallet. And yet ithas a minuscule share of 0.3% in organized retailing. The kirana or the general storesis the most common outlet for food products in India, though other formats likesupermarkets also exist. The food business is very low margin but high stock-turnbusiness model and efficient sourcing capabilities and logistic management is the keyto success in this segment. The major players in this segment are Apna Bazaar, Canteenstores, Food World, Subhiksha and Food Bazaar.

Source : Industry


COMPANY RESEARCH


Apparel Retailing is the country’s second largest opportunity for the organizedretailers. The clothing market is highly fragmented, with numerous players operatingacross a wide variety of formats. Branded apparel accounts for only 20% of the totalapparel market. . Men’s clothing currently accounts for 70% of all branded apparelsales as compared to 22% of children’s wear and 8% of women’s wear. The structureof apparel retail has changed dramatically in the recent past with the growth of largemulti-brand apparel outlets and manufacturer brand-led chains. Like in the west,specialty stores that have begun to grab market share in India.

Consumer Durable segment is the most organized retail segment in the country. Mostof the corporates in this segment have a network of exclusive stores (manufacturer-retailer) which is operated on either owned or franchise model. There is a parallelnetwork of authorized dealers that co-exists in this segment. More recently, singlelarge stores have come up across the country like Chennai’s Spencer’s or Sony Monyor Sumaria in Mumbai.

India is at an inflection pointInternational experience shows that it typically takes 10-15 years for organized retailto mature. As per A T Kearney, India in terms of purchasing power parity is at thesame stage as south-east Asia had been in the early 1990’s when the organized retailsector had taken off there. According to A T Kearney, India is on the verge of a retailrevolution. The organized market is expected to rise from the current 2% (US $4bn)of the retail pie to 5%(US$ 12bn) by 2005.

Source : Industry


COMPANY RESEARCH


Emerging trends in organized retailingOver the last five years, a number of large business groups such as Tata’s, RPG,Raheja’s and Piramal’s has set up stores/malls and built businesses within retail. Theseinclude the Rs1.9bn Food World - a leading supermarket chain set up by RPG; theRaheja’s Rs1.8bn Shopper’s Stop - a multi-brand departmental outlet and theCrossroads Mall set up by the Piramal’s. While many of these initiatives were initiallydriven by the need to use existing real estate, they are beginning to assume the contoursof a serious business today.Fuel retailers, notably BPCL and HPCL are also expanding their presence from fuelretail to grocery and convenience stores. Suitability of location, optimal utilization ofreal estate, diversifying business to reduce reliance on the commodity nature of fuelretail business and improve margins are the key factors that has lead fuel majors toenter into the retailing.Also, existing family owned businesses are expanding their businesses. The moresuccessful of them are the Nilgiris - a Bangalore base food retailer, Viveks - a 40-yearold Chennai based chain selling consumer durables and Narula’s - the food chain inNorth India.Interestingly, manufacturers are also looking for forward integration and are buildingchains around brands. Brands in apparel, footwear and durables have driven the growthof specialty chains and upgraded existing multi-brand outlet.

Emerging formats in India


COMPANY RESEARCH


Supermarkets/Hypermarkets: These are large (20,000 square feet plus) self-servicestores selling a variety of products at discounted prices. Supermarkets tend to belocated in key residential markets and malls, and offer competitive prices due toeconomies of scale in logistics and purchasing. This format is new to India with fewnoticeable players such as Foodworld, Nilgiri’s and Subhiksha.

Department stores: These large stores primarily retail non-food items such as apparel,footwear and household products. They stock multiple brands across productcategories, though some of them focus on their own store label (e.g., Marks & Spencer’sSt. Michael). Several local department store chains have opened shop in India in thepast 5 years (e.g., Shoppers Stop, Westside and Ebony).

Specialty chains: These retail outlets focus on a particular brand or product category,usually non-food items, and are located on high streets and in shopping malls. Whilemost specialty chains compete on service, a segment called “category killers” offersprice as an advantage (Toys ‘R’ Us is a good example of a category killer). Thisformat has seen the highest levels of adoption in India, with several chains establishinga strong presence, typically through franchising, e.g., Benetton, Arrow, etc.

Urban counter stores: These small family-run stores dominate food and non-foodretailing and are found in both residential and commercial markets in towns and cities.The food stores stock a wide range of branded and unbranded food items. Theytypically have a loyal clientele bound to them by personal relationships and theconvenience of credit and home delivery. Non-food counter stores typically stockmultiple local brands.


COMPANY RESEARCH


OutlookThe experience of other developing economies suggests that the transformation ofretail from an unorganized sector to an organized sector can be rapid. Organizedretail grew from less than 5% to over 35% in Thailand and Brazil, to 20% in Polandand 10% in China over an 8-15 year period. The key drivers of this change wereentry of best practice foreign retailers, the freeing of real estate markets and growth inincome.

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We believe that India is on the threshold of a Retail Revolution. Though the form andeventual size of the organized retail in India is uncertain, what is certain is that organizedretail is here to stay and will grow at a past pace. The removal of restriction on FDI inthe sector could be a key trigger for growth, which would bring in global players withtheir experience and exposure to retail management skills and technology.

Success of a retailer would hinge on skill and efficiency displayed in managing thefollowing key growth enablers - store location and size, effective space utilization,store maintenance, inventory management, asset turnover and customer service &satisfaction. Scalability of the format would be the other key determining factor forgrowth, as improving scale economies would yield margin expansion

If India follows the Chinese example, Retail in India in thenext 8-10 years could grow to …Grocery:• 10% of organized sector = US$12bn• Top 3 players = ~US$1.2bn each

Apparel:• 35% of organized sector = US$6bn• Top 5 chains = US$300m each


COMPANY RESEARCH


AnnexureInternational ValuationsRetail companies command valuations of close to 30x earnings in most developedeconomies. Following table highlights the key industry statistics of Retailers in US

Valuation Ratios Financial StrengthP/E 27.886 Quick Ratio 0.331P/Sales 0.977 Current Ratio 1.287P/Book 5.161 LT Debt/Equity 0.61P/Cash Flow 18.3 Total Debt/Equity 0.776

Profitability Mgt. EffectivenessGross Margin % 25.3 Return on Investment % 11.96Operating Margin % 5.6 Return on Assets % 7.98Net Profit Margin % 5.5 Return on Equity % 20.03

Source: Yahoo Finance

Indian Retailers : Comparative Historical Valuations

Year ended Sales OPM % NP Equity EPS CMP P/E MCap/SalesPantaloon Jun-03 4448 8.4 114 182 6.3 255 41 1.0Trent Mar-03 1115 5.6 99 131 7.5 237 32 2.8Titan Mar-03 7979 7.8 62 423 1.5 106 72 0.6Source: www.indiainfoline.com

Published in October 2003. All rights reserved. © India Infoline Ltd 2003-4.This report is for information purposes only and does not construe to be any investment, legal or taxation advice. It is not intended asan offer or solicitation for the purchase and sale of any financial instrument. Any action taken by you on the basis of the informationcontained herein is your responsibility alone and India Infoline Ltd(hereinafter referred as IIL) and its subsidiaries or its employees orassociates will not be liable in any manner for the consequences of such action taken by you.We have exercised due diligence in checking the correctness and authenticity of the information contained herein, but do not representthat it is accurate or complete. IIL or any of its subsidiaries or associates or employees shall not be in any way responsible for any lossor damage that may arise to any person from any inadvertent error in the information contained in this publication. The recipients ofthis report should rely on their own investigations. IIL and/or its subsidiaries and/or employees or associates may have interests orpositions, financial or otherwise in the securities mentioned in this report.India Infoline Ltd, 24 Nirlon Complex, Off Western Exp. Highway, Goregaon(E). Mumbai -63. Tel 2685 0101 / 0505. Fax 2685 0585

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