India’s Retail Tiger is Roaring Back-research Report by Edelweiss
India’s retail tiger is roaring back—stocks up >25-500% over the past 18 months—and is ready to take the big leap. We expect the dream run to sustain and the sector’s revenue (organised pie) to catapult to USD166BN by FY25E from USD55BN in FY16, >13% CAGR. Favourable macros—improving consumer sentiments, rising disposable incomes, urbanisation and lower penetration of organised retail—are envisaged to primarily fuel this boom. Moreover, recent structural reforms—demonetisation and Gst—have been potent catalysts. Also, post fiercely fought turf wars, offline and online players seem to have finally made their peace and are toying with the Omnichannel platform in their quest for success.
Key Growth Levers: A. POTENT CATALYSTS IN PLACE TO FUEL RETAIL BOOM
India’s organised retail tale is set for a fortunate twist and catapult to USD166BN by FY25E from USD55BN in FY16, >13% CAGR. The
retail boom is envisaged to be fuelled by favourable macros: (i) Rising disposable incomes and improving consumer sentiments–per
capita income clocked 10.2% CAGR over FY12-15; (ii) Attractive demographics–
Median age of 27 with ~50% of population in working age bracket; and (iii) Rising
urbanisation: 41% of population estimated to reside in urban areas by 2030 from 31.2% in FY11. Recent structural reforms are the icing on the cake, which will further burnish the industry’s prospects: a) GST is expected to accelerate demand shift to the organised segment as unorganised retailers cede turf due to stringent compliance requirements; and b) post demonetisation, we anticipate consumers to stay hooked to modern retail.
B. RECONFIGURING BUSINESS MODELS TO MASTER GROWTH TEMPLATE
Retailers have, over the past few years, tested various business models and have finally identified their operating moat:
1) Optimum store size:
Compact hypermarket (20,000–30,000sq ft) and supermarket (3,000-4,000sq ft) formats enhance sales per sq ft by focusing on right assortment; 2) Right product
mix: Players are targeting a balance between food & groceries (F&G) and apparel in their quest for profitability & productivity; and 3) Private
labels: Organised retailers are training focus on private labels (20% in India versus 35% globally) as they fetch higher margins and ensure greater customer loyalty. Moreover, considering high real estate cost, most players (except Dmart) have adopted the lease rental model. This lends flexibility in ease of entry and exit if sales per sq ft and returns on invested capital do not meet a company’s internal benchmarks.
C. THE RIGHT BLEND: OMNICHANNEL STRATEGY KEY SUCCESS MANTRA
Post bitterly fought turf wars between brick-and-mortar stores and e-commerce companies, players have gleaned that offering a
complete and seamless consumer experience is
mantra to success. Hence, while online retailers are shifting offline (Amazon’s tie up with Shoppers Stop), we anticipate offline stores to resort to the digital medium to target consumers (Future Retail shifting to Retail 3.0). In our view, “Omnichannel strategy” / “Brick and click” is the way ahead. Among categories, while
F&G is likely to be resistant to e-commerce play, electronics and low-value jewellery are most likely to warm up to the platform. Branded apparels are envisaged to deploy omnichannel strategy with online as well as offline presence.
Performance of Listed Companies
Company Specific 1. SHOPPERS STOP:
Shoppers Stop (SSL) is one of the best run retail companies in India and likely to reap benefits of management’s recent turnaround strategies. We expect same store sales growth (SSSG) to be aided by macro-economic improvement, which should drive discretionary spends. An improving proportion of the private label mix is also expected to boost SSSG. The company has maintained momentum in its retail space expansion (opening three–four SSL departmental stores per annum), which too should aid future growth. The company’s omni-channel strategy to counter online competition is on track, especially following its tie-up with Amazon.
Besides, the government’s directive (press note 3) coupled with draft policy on curbing discounting on e-commerce platform is aimed at curbing irrational discounting by online players. Stress in many online players is positive for physical retailers. However, the entry of single brand retailers such as H&M& Forever21 and heightening competitive intensity in the e-commerce space are key monitorables.
We believe, SSL is a potential turnaround story in light of: 1) new management team; 2) tie-up with Amazon which will boost growth via omni-channel (with estimated CAGR of 100% over the next two-three years); 3) rising salience of private labels; and 4) negligible net debt.
We expect SSL to post revenue and EBITDA CAGR of 12.0% and 32.7% over FY18-20, respectively.
Trent was amongst the earliest entrants in the organised retail sector in India and has focused on developing a robust business model in each of the retail formats pursued. The company primarily operates stores across three formats—westside, Star Bazaar and Zara. In our view, the businesses should be seen separately and valued also separately as each entails distinct value proposition.
Standalone business (Westside + Landmark)
We estimate Westside to continue to report 11% and 12% YOY SSSG in FY19 and FY20, respectively, anchored by focus on private labels and enhancing shopping experience. We expect improvement in EBITDA margin, which will play out due to double digit SSSG aided by operating leverage. Further, losses in Landmark will reduce which will improve overall EBITDA margin.
Trent’s focus on branded private labels and providing customers quality & reasonably priced fresh produce and meat & fish is a win-win strategy. Focus on fresh food offerings by emphasizing the proposition of “great quality at reasonable prices” is bound to attract higher footfalls. These footfalls can then be targeted for branded offerings. Moreover, housing of Star Bazaar’s private apparels into a standalone store under the Zudio brand can yield significant benefits in tier II & III cities.
Zara reported strong growth in FY18 despite stiff competition from H&M, reflecting its brand prowess. Going forward, we expect it to clock ~13-14% YOY revenue growth.
Baking in all at the company level, weestimate Trent to clock revenue and EBITDA CAGR of 21.9% and 39.4% Yoyover FY18-20, respectively.
Of the USD616BN India retail market, organised accounts for ~9% (retail market was USD386BN in FY12, of which organised was ~7%). Apparels &accessories contribute 22% to organised retail. Vmart is present in this segment and will continue to benefit from rising population, rapid urbanisation and presence in tier II, III &IV cities.
We believe, the company is well poised to tap big opportunities in tier II, III
&IV cities where its potential customers do not have access to aspirational products. Further, the company enjoys
an edge in cost structure (lowest rental costs) over peers. We expect Vmart to benefit from GST. Currently, the company pays 5-6% VAT on products. With readymade garments priced lower than INR1,000 attracting mere 5% GST, we believe it will benefit from the same. Vmart’s average selling price is ~INR300 owing to which the impact of GST will be limited. Vmart is a play on organised retail largely in Uttar Pradesh, Bihar and other North Eastern geographies. The company will be key beneficiary of recovery in discretionary spending as well as potential shift in spending pattern from unorganised to organised retail chain. Further, improving share of private labels from current level of >50% with potential to take it to ~75% will boost margins. We remain positive on the stock from long-term perspective as we believe that though new competition may emerge in the company’s dominant geographies, it is unlikely to disrupt its growth trajectory and only expand the consumption pattern from unorganised to organised format. We estimate V-mart to clock revenue and EBITDA CAGR of 20.9% and 23.4% Yoyover FY18-20, respectively.
4. FUTURE LIFESTYLE FASHION
Future Lifestlye Fashion (FLF) is one of the largest branded apparels and physical retailers in India with total retail space of 6mn sq ft spread across
>90 cities and a diversified portfolio of 30 brands straddling different segments (men’s, women’s and kid’s wear) and price points. The company has been logging strong SSSG (double-digit adjusted for base effect) and outperforming industry led by better inventory management, focus on premiumisation, better store layout, inventory liquidation and strong brands. From its strong portfolio of owned, licensed and investee brands, the company has identified six power brands to drive growth (Lee Cooper being the largest), which are currently contributing ~64% to FLF’S total brands (share expected to further increase on sharper focus and better brands). FLF has bagged a licence to sell Lee Cooper’s footwear business—anothergrowth lever within FLF’S branded business.
Power brands are margin accretive as they gain scale and garner operating leverage. Investee brands, on the other hand, provide an opportunity for stake sale as the brands grow. By virtue of an integrated model, FLF is a much better bet than other retailers.we estimate the company to clock revenue and EBITDA CAGR of 26.1% and 31.4% YOY, respectively, over FY18-20.
5. ADITYA BIRLA FASHION AND RETAIL
ABFRL is the No.1 player in men’swear on account of Madura; it is No. 1 in women’swear as well driven by Pantaloons. We believe, the company is better placed to exploit the recovery in discretionary spending than other branded apparel players owing to its sheer scale and widespread network. Madura’s growth and margins—which had been impacted by heightened competition from e-commerce players, higher ad spends and lower operating leverage—have bounced back strongly. We envisage a gradual recovery driven by renewed focus on new &fast-growing segments and improvement in throughput per outlet. Entry in the online segment and focus on becoming the largest brand therein are also bound to boost long-term growth. Hence, Madura’s growth trajectory will sustain, in our view.
Pantaloons, which is a turnaround story, has panned out as anticipated. Revenue pickup and strong margin expansion have led to Pantaloonsgenerating free cash flow, which is encouraging. This, coupled with focus on strong store expansion, should help tap the pickup in discretionary spends. We expect the company to post decent SSSG led by a new business model with focus on right pricing, fashion and private label mix. The company’s initiatives like increasing the proportion of private labels, enhancing inventory turns and reducing the sale season period should drive a sustainable improvement in margin.
Anchored by anticipated revival in organised retail formats as well as prudent store expansion and cost
Source: Edelweiss research