Naya Bazaar | Value Research When a population of more than one billion starts changing the way it acquires its roti, kapda and makaan, everyone stops to take note.
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Naya Bazaar

When a population of more than one billion starts changing the way it acquires its roti, kapda and makaan, everyone stops to take note.

When a population of more than one billion starts changing the way it acquires its roti, kapda and makaan, everyone stops to take note.

Those who believed that social mentalities are too slow to accept the glitz of modern retail formats are surely kicking themselves. For a visit to the launch of a new Reliance Fresh outlet is at your own risk, with surging crowds reaching stampede proportions. Now couple this lucrative crowd puller with an advertising and media blitz. Voila! Indians have developed a new mall craze.

It's no surprise then that the who's-who of the Indian industry is shedding threats of diversifying into unrelated businesses to take a dip here. So whether it is the energy giant- RIL or the mai baap of all retailers - Wal Mart, everyone wants a pie of the slice.

Amid the hoopla and some very impressive analyst estimates (estimated size of sector- Rs 1 trillion by 2010), we put in perspective the opportunities for the investor.

Pantaloon Retail
Idirect Code: pentret
Market Cap*: Rs 5,912 crore
PE*: 135.5 times
* As on April 24, 2007

Pitted as India's own Wal-Mart, Pantaloon Retail owes its phenomenal success to the vision of its founder - Kishore Biyani. The man, who drew inspiration from Sam Walton’s (founder of Wal-Mart) biography, has today scripted his own bestseller. The company is the flagship enterprise of the Future Group, which operates six verticals that synchronise management of supply chain and distribution, real estate development, brand and media management apart from managing the group's financial products. Never one to shy away from launching new formats in the market, the company is present across a large number of consumer segments, from retailing general merchandise through the hypermarket format to selling samosas through snack counters.

A look at the financials of the company over the five-year period is evidence of its stellar performance. The hyper growth in number of stores has been supported both by an impressive growth in sales and a concurrent improvement in operations. Profits between 2004 and 2005 almost doubled, even when sales grew by a lesser 65 per cent.

While the management has earned a strong reputation of executing mammoth projects, the risk of execution remains a contentious issue for the company. Towards this end, the company recently undertook a restructuring exercise, spinning each of its retail formats as separate business units led by a CEO. Unconfirmed reports point towards a possible dilution of equity in its subsidiaries to scale up operations further.

A keen development has been the increase in joint ventures to experiment with new formats. So far most of the formats were developed ground up. Such a move bodes well for the company as it will lead to effective risk sharing of new ventures undertaken. Another notable achievement by the company has been in amassing real estate through its Kshitij and Horizon funds. At sky-high valuations, quality real estate holds the key to success in this industry. At a target of covering 30 million sq ft. of retail space by 2010-2011, Pantaloon retail managed to acquire 24 million sq ft. by January 2007.

It is this first mover advantage that Pantaloon Retail will leverage on with the advent of Reliance Retail, RPG's Spencer's and the yet-to-be-launched Bharti Wal-Mart.

At a market cap of around Rs 5,900 crore, the company has a long way to go before it can be counted amongst the Sensex brigade. But as the organised retail industry matures, Pantaloon Retail with its scale of operations has emerged as the torch-bearer for the industry.

Shoppers’ Stop
Idirect Code: shosto
Market Cap*: Rs 2,309 crore
PE*: 64.44 times
* As on April 24, 2007

The brainchild of the K. Raheja group, the first store came up in Mumbai in 1991 as a men's store. Since then the company has experimented with many formats and is present across the department store segment, hypermarket segment and the specialty segment. After it went public in early 2005, the company went ahead with its ambitious expansion plans resulting in the emergence of many new specialised retail ventures.

The numbers look impressive with a 42.45 per cent increase in profits during 2005-2006. Apart from robust sales, the company has seen an increase in other income, which constitutes fee from its loyalty programme as well as income earned on renting in-store space to other brands. To this extent the management has been able to successfully leverage on its visibility and walk-ins. Another plus point has been the success of its loyalty programme. The sales garnered from the First Citizen membership programme touched an impressive 64 per cent in the third quarter (Oct-Dec ‘06) of 2006-2007.

A key challenge for the company has been the delays in roll out of its stores. In the retail industry, such delays can throw the entire inventory management process out of gear thereby adversely affecting the profitability of the company.

The company recently entered into a joint venture with Nuance Group AG of Switzerland with an aim to position itself in the extremely lucrative duty free store segment at airports. The company's next big leap is planned in the luxury retail segment. Apart from these potential revenue streams, the company's positioning in the catalogue and internet retailing space will add a further buffer to sales.

Idirect Code: TRENT
Market Cap*: Rs 1,033 crore
PE*: 32.57 times
*As on April 24, 2007

Another one of the many successes of the Tata group, Trent is poised to be a key beneficiary of the retail boom. Trent’s retail journey began only in 1998 after it acquired Littlewoods Department store in Bangalore from Littlewoods International. The department store was renamed ‘Westside’ which has since then emerged as a strong brand. As of now, Trent is present only in three of the retail segments viz. department stores, hypermarket and a specialty book store. The company has used a combination of organic (hypermarket chain Star India Bazaar was launched in October 2004) and inorganic (acquiring Landmark book stores in August 2005) growth to chart its growth in the retail business.

Unlike most other department stores, 90 per cent of Westside's products are sold exclusively at Westside outlets. The store has been successful in building some of its own brands that have become quite popular. By doing so, the company has been able to circumvent intermediary commissions.

Apart from an impressive growth in sales, Trent has managed to better its operating profit as well. In November 2006 the company made a rights issue to fund its expansion of Westside and Star India Bazaar stores. The target is to increase the count of these two formats by 30 more stores by 2010. From four Landmark book stores in 2006, Trent has increased this count to 9.

In April 2007, the company entered into an agreement with Xander Group Inc., a global private equity firm for access to quality retail infrastructure. Through this agreement Trent will enjoy anchor tenancy rights. Although the company has already identified 29 locations for the 30 planned stores, this deal will enable the company to effectively deal with the scarcity of quality infrastructure.

Trent has been a slow and steady player in this space. The company has explored only three formats and has no explicit plans of entering any new formats. Nevertheless, one can expect a lot more action.

Piramyd Retail
Idirect Code:PIRRET
Market Cap*: Rs 128 crore
* As on April 24, 2007

The smallest of the four listed companies, Piramyd Retail marked the retail foray of the Ashok Piramal group. It was the first to introduce the modern retail format in India through its Crossroads mall (Pune) in 1999 and the first to introduce the concept of shoppertainment in 1999 through its entertainment centre called Jammin. Currently, the company is present across two formats — the lifestyle department store (Piramyd Megastore) and the supermarket segment offering food, home and personal care products (Trumart).

Despite its pioneering achievements, Piramyd Retail has been making losses for the past four years. The impressive growth in sales has not translated into profits.

The IPO in November 2005 was rather aggressively priced (Rs 120). Since listing, the company failed to deliver returns for its investors. Interestingly, its successful roll out of stores stands in complete contradiction to the lethargy seen in the financials. At the time of its IPO, the company operated five Megastores and eight Trumart stores. Since then it increased this to seven and 25, respectively.

In March 2006, the company revamped its management structureand and sold its Crossroads mall to the Future Group. The Crossroads mall in Pune is a lucrative property owing to its popularity among the affluent class and easy accessibility. However, these advantages did not translate into footfalls at the Piramyd Megastore, which enjoyed anchor tenancy rights at this mall. (An anchor tenant is responsible for footfalls and in turn receives considerable discount on the rent). Though the company was in talks with foreign retailers to roll out specialty stores and hypermarkets around August 2006, nothing has materialised. On April 18, 2007 the company initiated an upgradation of its supply chain management by implementation of LS Retail. This step will lead to better operations management.Though the company had a first-mover advantage in many areas, it failed to capitalise on this and the more aggressive business strategies of its competitors have emerged successful.

While many investors would see the valuation as a discount to its peers, the company's ability to leverage on its supermarket format (Trumart) is likely to face stiff competition. The superior supply chain developed by the supermarkets such as Subhiksha, Reliance Fresh and Foodworld may be difficult to replicate for the company.

Investor Take Away
Indian retailers are scaling up operations by investing in IT for better store management, developing real estate funds and sprucing their supply chain management. But the real challenges are yet to come.

Unavailability of quality real estate at low prices will continue to exert pressure and the scaling up of supply chain systems will face many roadblocks given the fragile infrastructure of India. The heat of the competition is yet to be felt. The real action in the retail space will be felt after Reliance Retail (subsidiary of RIL), Aditya Birla Nuvo (acquired Trinethra Superretail), RPG group, ITC and Bharati Wal-Mart are into full play. Besides having deep pockets, these players have a history of managing the best and biggest companies in India. As the retail arm of these business houses expands, they could look at floating retail subsidiaries as separately listed entities.

The infancy of the industry is evident from the number of pure retail players listed on the exchange. And, these few stocks are not yet resilient enough to add that Midas touch to your portfolios. Having said that, keeping an eye on these players won't be too difficult. For instance, your decision on whether to hold or sell your stake in Pantaloon Retail will be made easier if you find your share of wallet, and that of your peer group, gravitating towards Bharati Wal-Mart. As Sam Walton aptly says: “There is only one boss, and that is the customer, and he can fire everybody from the chairman on down, simply by spending his money somewhere else.”

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