In­dia’s Retail Tiger is Roar­ing Back-re­search Re­port by Edel­weiss

Images Retail - - CONTENTS - – By Ab­neesh Roy and Alok Shah, Edel­weiss Group

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.


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.


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.


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.

Star Bazaar

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.


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.


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

Source: Edel­weiss re­search

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