BLB Research Research A Passion

Money Look

Initiating Coverage

24th Nov 2007

Retail Sector

Deepika Bhatia [email protected] 91-9811418866

Private Client Group

BLB Research Research A Passion

Money Look

Table of Contents I II III IV V VI VII VIII IX X Executive Summary ...................................................................................................... Background .................................................................................................................... Global Scenario ............................................................................................................. Indian Retail Scenario................................................................................................... Retail Formats................................................................................................................. Growth Drivers.............................................................................................................. SWOT Analysis.............................................................................................................. Challenges....................................................................................................................... Investment Universe .................................................................................................... Company Analysis Pantaloon Retail ................................................................................................ Trent .................................................................................................................... Shoppers Stop .................................................................................................. Provogue ............................................................................................................ Vishal Retail ..................................................................................................... Koutons Retail ................................................................................................. Page No. 3 4 5 7 13 15 17 19 22 23 25 27 29 31 33

Private Client Group

BLB Research Research A Passion

Money Look

Executive Summary
The retailers in India have to learn both the art and science of retailing by closely following how retailers in other parts of the world are organizing, managing, and coping up with new challenges in an ever-changing marketplace. Indian retailers must use innovative retail formats to enhance shopping experience and try to understand the regional variations in consumer attitudes to retailing. Retail marketing efforts have to improve in the country: 1. Advertising, promotions, and campaigns to attract customers have to be designed and executed to build loyalty by identifying regular shoppers and offering benefits to them. 2. Efficient management of high-value customers is vital. 3. Monitoring customer needs constantly must be done with long-term relationships in view. The above are some of the aspects which Indian retailers need to focus upon on a more proactive basis. Growth Drivers for the Organised Retail are identified over here: Higher Disposable Income Growing Working Women population Adoption of Nuclear Family culture Baby Boomer Effect Growth in Urban Population Robust Outlook towards branded products Growth in Retail Malls and various other new formats Plastic Money becoming a greater pie of credit

Private Client Group

BLB Research Research A Passion Background Retailing is selling goods more than

Money Look

Retailing consists of the sale of goods or merchandise, from a fixed location such as a department store or kiosk, in small or individual lots for direct consumption by the purchaser. Retailing is a well recognized business function which compromises making available desired product in the desired quantity at the desired time. This creates a time, place and form utility for the consumer. The success of retailing is highly dependent on an efficient supply chain management. A well-developed supply chain reduces wastages and transaction cost thereby reducing the cost of inventories to be maintained by the producers and the traders. A reduction in the cost of inventory management leads to a reduction in the final price to the consumer. Retailing has been identified as a thrust area for promotion of textiles, processed foods, agricultural and horticultural produce. Retail Sector can be divided into organised and unorganised sectors:

Unorganised Retail

Unorganised retailing is characterized by a distorted real-estate market, poor infrastructure and inefficient upstream processes, lack of modern technology, inadequate funding and absence of skilled manpower. Therefore, there is a need to promote organised retailing. Organised Retail refers to a form of retailing whereby customers can buy goods in a similar purchase environment across more than one physical location for verticals from food, grocery, apparel, consumer durables, jewellery, footwear, beauty care, home dcor, books to music.

Organised Retail

Private Client Group

BLB Research Research A Passion Global Scenario Retail issues in developed markets around the globe basically will be a mirror image of issues confronted by the U. S. economy-aging populations, shrinking share of retail spending and increased spending on healthcare.

Money Look

The Global retail Industry is one of the largest industries worldwide, increasingly being controlled by a handful of powerful corporations based mainly in the U.S and Europe, namely, Wal-Mart, Tesco, Carrefour and Metro. These MNCs retailers have by and large have saturated in their home countries and are looking for penetrating emerging markets of India, China and Russia as they are minimally penetrated by organised retail. Shopping will become more experiential; eating, being entertained and living the shopping experience will take on prominence. The global market will grow rapidly in our flat world, with markets such as China and India granting access to the worlds best retailers.

Retailing in United States

Retail Sector is the second largest industry in U.S. both in number of establishments and number of employees. The U. S. retail industry generates $3.8 trillion in retail sales annually ($4.2 trillion if food service sales are included), that is approximately $11,993 per capita. Wal-Mart is the world's largest retailer and the world's largest company with more than $312 billion (USD) in sales annually. Wal-Mart employs 1.3 million associates in the United States and more than 400,000 internationally. The second largest retailer in the world is France's Carrefour.

Retail Trends in other Countries

In Contrast, populations in developing markets will remain relatively young and will increase share of retail spending

China had initially restricted FDI in retailing to only joint ventures at 49 percent foreign holding and only at specified locations subject to a ceiling on the number of stores. Malaysia, Indonesia, Thailand and Japan have enforced zoning restrictions for mega-retailers. There are minimal capital requirements for foreign retailers in Sri Lanka. The Philippines has imposed sourcing and reciprocity requirements on foreign retailers. In Japan, mega-retailers must seek the views and permission of small local stores before opening a new store. In the US, major cities such as Los Angeles, California, Chicago and New York City have restricted the opening of Wal-Mart stores within city limits. France enacted the Raffairin Act that regulates the growth

Private Client Group

BLB Research Research A Passion

Money Look

of hypermarkets larger than 300 square feet. In Thailand, the government has set up an assistance fund for local retailers due to the impact of mega retailers.

Dearth of Retailing in Asian Economies

Country
U.S. Taiwan Malaysia Thailand Indonesia China India

Total Market ($ bln)

4,030 40 20 32 75 325 360

Share of Organised Sector ( percent)

85 81 55 40 30 15 4

Comparative Penetration of Organised Retail for International Economies

Developing markets will continue to build a big pool of university-educated labor and talent, shifting the nucleus of knowledge workers

15%

19% 45% 60% 70% 85% 96%

85%

81% 55% 40% 30% 15% 4% India

U.S.

Taiwan

Malaysia Thailand Indonesia

China

Organised

Unorganised

Global Players operating in India:

Name Metro AG McDonalds Wal-mart Woolworths Marks and Spencer Benetton Landmark Lifestyle Country Germany U.S.A. U.S.A. Australia. U.K. France Middle East Route (Franchise/JV/FDI) Cash and Carry JV JV JV Franchisee Manufacturing NRI/OCB route Segment Food Food Supply -chain Management Consumer Durables Departmental Stores Apparel Lifestyle Store

Private Client Group

BLB Research Research A Passion Indian Retail Scenario Retailers in India have to experiment with formats maintaining scalability in terms of segments, along with deepening penetration levels
History

Money Look

Traditionally Indian Retail can be traced back from Weekly Markets, Melas, Village Fairs in Small towns and villages to Kirana stores, PDS outlets, Khadi Bhandaar, co-operative stores in Urban cities. The wave of retail began with various textile manufactures like Bombay Dyeing, Raymonds, S Kumars, and Grasim foraying into selling the product through their outlets and competition among FMCG players driving the forces towards retailing. The evolution of retailing lead to an emergence of various modern formats like Shopping malls, Super-marts, Hyper-marts, Departmental Stores, Apparel Stores, etc. catering to majorly all sectors of society providing the all-important 3Vs Value, Variety and Volume.

Retail-a boom
Indian Retail Sector is at its inflexion point awaiting multifold growth. The Retail Industrys Size is presently Rs 1,44,253 crore out of which the organised sector contributes to a mere 4 percent of the market size, fairly dominated by scattered, unregulated, & unorganised players. Retail sector is expected to grow in tandem to the GDP growth-rate. This sector is slated to be the biggest contributor to GDP of around 10 percent and has promisingly generated ~8 percent employment in India, that is moving towards a larger generation of employment opportunities in the times ahead.

Introduction

Growth /Peaking

Maturity

Decline

India (1995)

Private Client Group

India (2006)

India (2011)

BLB Research Research A Passion

Direction of Organised Retail

Money Look

Due to the urban-rural divide, organised retail will grow in the metros and large cities, followed by semi-urban and rural areas. Thus India is on the verge of an enormous multi-fold growth of organised retail. In a span of just 5 years, organised retail is expected to expand in urban cities besides making an entry in semi-urban and rural areas. Presently, the organised retail market is ~4 percent of the total retail, that is around Rs 67,310 crore and is expected to compound at 27 percent per annum, aggregating to Rs 1,75,103 crore (7.44 percent of the total retail) in 2010-11. The retail industry is assumed to grow at GDP growthrate. The retail revolution signals softening of inflation rate on an yearly basis, due to elimination of intermediaries in retailing and passing on of all the benefits to the consumer. The mantra expediting the retail growth is Consumer is the King.

Organised Share of retail sector is expected to increase to 8-9 percent in 2010-11 from 4 percent in 2007

Penetration of Organised Sector

2006-07

2010-11

Segmental Growth
Food and Grocery

Food and grocery is largest pie of total retail sales

This is the largest vertical of 74.4 percent of retail size compromising fruits and vegetables, milk and milk products, staples, cereals, grains, pulses, processed food, ready to cook and ready to eat meals, spices and other eatables. This is least penetrated segment across all verticals of around 1.5 percent, being the most untapped pie. According to NSSO 60th round, 54 percent of the rural and 42 percent of urban expenditure was on food.

Private Client Group

BLB Research Research A Passion

Money Look

Apparels

Apparel is the organised segment

most

Clothing and textile is a large organised vertical dominated by textile manufacturers Raymond, Bombay Dyeing, Vimal, and by big retailers like Pantaloon, Pyramyd, Koutons having ~16.4 penetration level. Increasing disposable incomes and change in the lifestyle needs has pushed the segment. Consumer Durables The electronics and consumer durable is the biggest organised segment penetrated to ~20 percent. There lies more unearthed growth in the verticals as the craze for electronic gadgets have been picking up with the advent of nuclear families. Home Dcor and furnishing

Growth in nuclear families drive the demand for consumer durables

Home dcor will expand at highest pace

The demand for furnishing is going to be spearheaded by a huge demand for the real-estate, paving way to tap the unorganised segment. Presently only a few players like Gautier, Godrej, & Durian function as organised entities. Jewellery and Watches

Luxuries lifestyle is adopted

Titan is the early entrant in the segment followed by MNCs Oyzterbay, Tanishq, Swaroski, Orra, Gitanjali, & Ddamas driven by demand for fashion accessories, and huge advertising and promotion campaigns. Beauty Care

Hectic lifestyle will govern concern for Grooming Footwear is largely organised segment

The organised players in Beauty Care are HLL (Lakme Salons), Marico (Kaya), Health and Glow are having a huge growth impetus. Footwear Leaving aside the Apparel, Footwear segment is forming a big pie in the organised retail sector, expected to grow to greater heights with foreign payers like Crocs Inc. Books, Music and gifts In addition to Tier-II and Tier-III cities, the habit of reading books and listening to music is picking up among the Tier-I cities. The stores like Oxford Bookstore etc are experiencing this upswing.

New Habits adopted

Private Client Group

BLB Research Research A Passion

Money Look

Growing Trends of Organised Retail

200000

150000

Retail Volume (Rs. Cr.)

100000

50000

2007-08E

2008-09E

2009-10E

2010-11E

Year

Food and Grocery Consumer Durables Jewellery and Watches Footwear

Apparels Home Dcor and Furnishing Beauty Care Books, Music and gifts

Organised Retail Growth in Indian Cities

The Retail sector contributes to around 36 percent of GDP in India and is largest employment generator. The sector is dominated by small-scattered unorganised regional players, large players contributing to meager 10 percent of the total pie. Organised retail is at its nascent phase wherein the large organised retail groups are having aggressive expansion plans to penetrate the Metros and Tier I cities and establish themselves

Private Client Group

2011-12E

2005-06

2006-07

10

BLB Research Research A Passion

Money Look

amongst rural masses of Tier I and Tier II cities. There lies a challenge for retailers to experiment with new value formats along with developing customer loyalties. Since there will be demographic shift in population growth, urbanization and migration due to transition in urban household growth and income distribution. The total retail market in the top 67 cities in India in 2006 was Rs. 2.55 trillion, which is expected to increase to Rs. 3.91 trillion in 2011. According to CRISIL, around 87 percent of the retail opportunity comes from top 25 cities compromising Metro Delhi, Mumbai, Calcutta, Mini Metros Hyderabad, Chennai, Bangalore, Mini Metros Ahmedabad and Pune, Tier I cities of Kanpur , Nagpur, Surat and Ludhiana, Tier II cities Coimbatore, Chandigarh, Lucknow, Kochi, Jaipur and Tier III cities Vadodara, Vizag, Indore, Vijaywada, Thiruvananthpuram, Bhopal, Nashik and Madurai. The levels of penetration in the top 67 cities are expected to leap.

Organised retail has been established in Metros and Tier 1 cities, other cities having negligible level of penetration

Pentration 2010 (%)

Pentration 2006 (%)

1%
15%

3%

5%

40%

20% 15%
30%

Top 6 Cities Next 24 Cities

Next 37 Cities Rest of India

Private Client Group

11

BLB Research Research A Passion

Foreign Direct Investment

Money Look

FDI regulations in retailing have not deterred prominent international players from setting up businesses in India

Before 1997, there was no restriction on FDI in retail sector due to which McDonalds in 1996 and Foodworld, a 51:49 JV between Spencer and Dairy Farm International in 1997 started operating in India. After 1997, FDI in retail in single brand is restricted to 51 percent (Tommy Hilfiger, Mango, Adidas, Benetton) and in cash and carry format 100 percent FDI is allowed. The second run of reforms are eagerly awaited by industry players as many MNCs are knocking the FIPB door to enter into front and back end retailing operations as they would like to garner the reaping fruits of Retail boom in India. The opening-up of the retail sector will bring technology, quality standards, integration with global supply-chains, & marketing, ushering-in newer economic opportunities, more employment avenues and to release the growth path for India.

Routes adopted by Foreign Players

Franchise Franchise route involves granting of rights by one party, the franchiser to another, the franchisee in return for a sum of money. The franchisee is allowed to conduct business using the franchisers know-how and brand name. There are various levels of franchisee: Unit franchisee, multiple franchises, master franchisee and regional franchisee. The foreign players which have opened franchisee across various verticals of fast food, apparels, and entertainment are Nike, Pizza Hut, Subway, Tommy Hilfiger, Marks and Spencer, Swarovski and Hugo Boss. Cash and Carry Wholesale Trade In Cash and Carry Wholesale Trading, 100 percent FDI has been allowed under the automatic route by FIPB to encourage efficiency in back end supply chain management. A player like Metro, Shoprite and Wal-mart have forayed to strengthen the supply-chain management as done by the manufacturers and wholesalers till now. Joint Venture Multi National like McDonalds, Reebok, Wal-mart have entered into joint venture with Indian companies with share not exceeding 49 percent. Manufacturing The foreign manufactures sets up its Indian unit to manufacture and forward integrated to retailing its products like Bata and Benetton.

Private Client Group

12

BLB Research Research A Passion Retail Formats

Money Look

Conventional Formats

Kiranas These are food and non-food neighborhood counter stores, also called mom and pop stores in western countries. These are big chunks forming the segregated and unorganised retail segment. These are family-ownedand-run retail-outlets picking the goods from wholesalers totaling to around 12 million stores across India. Mandis These are the largest chunk of unorganised retail catering to urban and rural masses. Mandis are physically located at different regions to enhance convenient shopping. The sellers bring across various products like eatables, vegetables and fruits, pulses, cereals, spices etc. The most prominent of them are sabzi mandis found in most of the localities across India. Village Haats This form is operating in rural areas where buyers and sellers gather once in a week or month from nearby villages and small towns to cater their livelihood and leisure needs. These haats are a source of entertainment and socialization among rural masses. Push Cart Vendors The are categories of vendors roaming from door to door in various localities selling fruits, vegetables, and other eatables, from which mostly housewives makes purchases that too on credit.

Modern Organised Retail Formats

Upcoming Retail Formats

Modern Formats Shopping Malls Area (sq. ft) 60,000-7,00,000 Points of Differentiation Multi-format, multiproduct, multi-brands catering lifestyle needs Multi-verticals Single vertical Sigle Vertical Multi-branded single verticals, focusing on high-end customers Multi-branded, single vertical on specific needs of customers Owned/Franchised single product

Hypermarts Supermarts Departmental Stores Apparel Stores

50,000-70,000 5,000-10,000 20,000-50,000 20,000-25,000

Specialty format

2,000-5,000

Exclusive formats

500-5,000

Private Client Group

13

BLB Research Research A Passion

Money Look

Advantages of Conventional and Modern Organised Retail Formats

Conventional Low operating-cost and overheads Proximity to consumers Long operating-hours Strong relations with customers Modern Organised Large bargaining power Range and variety of goods Quality assurance (brandrelated, durability) Convenience and hygiene

In the long run, both traditional and modern retail formats will co-exist providing the benefits of both the formats. Organised retail will dominate the traditional formats, which will fall under the new evolving hub-and-spoke, and cash-&-carry models.

Business Models suiting Indian Scenario

Cash-&-carry Wholesale Model

Cash-&-carry is a form of retail trade in which goods are sold from a wholesale warehouse operated either on a self-service basis where customers settle the invoice on-the-spot or pay cash and carry the goods away themselves. The cash-&-carry player also performs many value-added functions, including selling and promoting, buying and assortment building, bulk-breaking, warehousing, transporting, financing, risk-bearing, supplying market information, and providing management services.

Hub-and-spoke Model
Retail Chains are entering residential areas with the hub-andspoke model, whereby one large store supports various smaller stores in the nearby residential areas. This is win-win model is well-suited to the Indian business scene where large stores obtain supplies from the warehouse and supplies to the consumers, involving both large payers acting as wholesalers and local kiranas as retail outlets. With efficient supply chain management, availability of space and proper technology in place, this will not take much time. The Piramyd Retails Trumart Stores (food and grocery) in Mumbai and Pune are based on a similar model.

Private Client Group

14

BLB Research Research A Passion Growth Drivers

Higher Disposable Income

Money Look

The disposable income has been showing a rapid increase from the last few years and is expected to grow steadily because the proportion of the major consuming class (population having incomes higher than Rs 90,000) is expected to reach 48 percent by 2009-10 from 20 percent in 1995-95, at the 2001-02 prices, at a CAGR of 9.3 percent over the next 8 years leading to new consumption patterns due to increasing depth in the consumers pocket.

Growing Working women population

The propensity to spend in the case of working women is higher by 1.3 times as compared by housewives. According to the census report, the population of working women increased to 26 percent in 2001 as compared to 22 percent in 1991.

Adoption of Nuclear Family culture

The increase in per capita income paved way to increase the nuclear-family culture. The proportion of nuclear families as a percentage of total household population has increased as shown by fall in average household size from 5.57 in 1991to 5.36 in 2007, expected to fall further to 5.02 by 2011. This will fuel the growth of organised retail.

Baby Boomer Effect

The demographics of Indian population has a steep growth in earning population (15-60 yrs). In 2000, 593 million people (58.3 percent of total population) constituted the age bracket of 15-60 yrs growing from an unprecedented level of 335 million people (54 percent of total population) in 1975 at a rate of 77 percent (CAGR of 2.3 percent) in contrast to a population growth of 64 percent (CAGR of 2 percent) over the same period of 25 years. Over the next 15 years, the earning population is expected to increase to 62.8 percent in 2015, translating into a population of 782 million.

Growth in Urban Population

Urbanization has increased at a rate of 2.7 percent over the last 10 years (1990-2000). In 2000, the urban population was estimated to be 281 million (27.7 percent of the total population). This trend is likely to continue and urbanization is expected to grow at 2.4

Private Client Group

15

BLB Research Research A Passion

Money Look

percent between 2000 and 2015. In 2015 the urban population is expected to be 401 million, constituting 32.2 percent of the total population.

Robust Outlook towards Branded products

Due to liberalization of manufacturing sector, various organised branded products have entered into Indian markets, thereby developing and widening the basket for branded finished goods. With the advent of International competition, new trends and lifestyles are evolving among India masses resulting into 10-15 percent growth in branded products. This has established the base for organised retail market in India.

Growth in Retail Malls and various other new Formats

Real Estate players like Rahejas, Future Group, DLF, Omaxe, Piramal Group, Parsvnath, Unitech are developing retail malls and leasing out the retail spaces to various retailers of varied products making it a one-stop shopping destinations in urban and semi-urban cities. These shopping-cum-entertainment malls are wooing young buyers to increase their conversion rate backed by increasing foot-falls. Around 358 malls have come up by 2007, covering a total space of 87 million square feet, thereby pushing organised retail to new heights.

Plastic Money becoming a greater Pie of credit

The use of plastic money in the form of debit and credit cards has expanded multifold in last 5 years. The number of credit cards has grown at a CAGR of 28 percent and debit cards galloped by 140 percent. The customers have adopted the habit of electronic payments and leveraging their pockets shifting from basic needs to lifestyle products.

Private Client Group

16

BLB Research Research A Passion SWOT Analysis

Money Look

STRENGHTS

Retailing is a technology-intensive" industry. It is technology that will help the organised retailers to score over the unorganised retailers. Successful organised retailers today work closely with their vendors to predict consumer demand, shorten lead times, reduce inventory holding and ultimately save cost. Example: Wal-Mart pioneered the concept of building competitive advantage through distribution & information systems in the retailing industry. They introduced two innovative logistics techniques cross-docking and EDI (electronic data interchange). On an average a super market stocks up to 5000 SKU's (Stock keeping Units) against a few hundreds stocked with an average unorganised-retailer.

WEAKNESSES

Less Conversion level: Despite high footfalls, the conversion ratio has been very low in the retail outlets in a mall as compared to the standalone counter parts. It is seen that actual conversions of footfall into sales for a mall outlet is approximately 20-25 percent. On the other hand, a high street store of retail chain has an average conversion of about 50-60 percent. As a result, a stand-alone store has a ROI (return on investment) of 25-30 percent; in contrast the retail majors are experiencing a ROI of 8-10 percent. Customer Loyalty: Retail chains are yet to settle down with the proper merchandise mix for the mall outlets. Since the stand-alone outlets were established long time back, so they have stabilized in terms of footfalls & merchandise mix and thus have a higher customer loyalty base.

Private Client Group

17

BLB Research Research A Passion

Money Look

The Indian middle class is already 30 crore & is projected to grow to over 60 crore by 2010, making India one of the largest consumer markets of the world. The IMAGES-KSA projections indicate that by 2015 India will have over 55 crore people under the age of 20 reflecting the enormous opportunities possible in the kids and teens retailing segment. Organised retail is only 4 percent of the total retailing market in India. It is estimated to grow at the rate of 27 percent p.a. and reach Rs. 1,37,000 crore by 2010. Percolating down: In India it has been found out that the top 6 cities contribute 66 percent of the total organised retailing. While the metros have already been exploited, the focus has now been shifted towards the tier-II cities. The 'retail boom' of which 85 percent has so far been concentrated in the metros, is beginning to percolate down to these smaller cities and towns. The contribution of these tier-II cities to total organised retailing sales is expected to grow to 20-25 percent. Rural Retailing: India's huge rural population has caught the eye of the retailers looking for new areas of growth. ITC launched India's first rural mall "Chaupal Saga" offering a diverse range of products from FMCG to electronic goods to automobiles, attempting to provide farmers a one-stop destination for all their needs. "Hariyali Bazar", started by DCM Sriram group, provides farm-related inputs & services. The Godrej group has launched the concept of 'agri-stores' named "Aadhaar" which offers agricultural products such as fertilizers & animal feed along with the required knowledge for effective use of the same to the farmers. Pepsi on the other hand is experimenting with the farmers of Punjab for growing the right quality of tomato for its tomato purees,pastes.

OPPOURTUNITY

Private Client Group

18

BLB Research Research A Passion

Money Look

THREATS

If the unorganised retailers are put together, they are parallel to a large supermarket with little or no over-heads, a high degree of flexibility in merchandise, display, prices and turnover. Shopping Culture has not developed in India as yet. Even now malls are just a place to hang around, largely confined to window-shopping.

Private Client Group

19

BLB Research Research A Passion Challenges in India

Money Look

Retailing as an industry in India still has a long way to go. To become a truly flourishing industry, retailing needs a few changes in regulations and functions: Automatic approval not permitted for foreign investment in retail. Regulations made to restrict real-estate purchases, and to over-come cumbersome local laws. Taxation that favors small retail businesses. Presence of developed supply-chain and integrated IT management. Increase in trained work force. Intrinsic complexity of retailing rapid price changes, constant threat of product obsolescence and low margins. Factors Barriers to FDI Description not permitted in pure retailing Franchisee arrangement allowed Government does not recognize the industry Lack of urbanization Poor transportation infrastructure Consumer habit of buying fresh foods Administered pricing Implications
Absence of global players Limited exposure to

FDI

practices

best

Lack of Industry Status Structural Impediments

Restricted availability of finance

- Restricts growth and scaling up

Lack of awareness of

High Cost Estate

of

Real

Pro-tenant rent laws Non-availability

of government land, zoning restrictions Lack of clear ownership titles, high stamp duty (10 percent)
Several segments like food and Distribution,

Supply Chain Bottlenecks

apparel reserved for SSIs logistics constraints restrictions of purchase and movement of food grains, absence of cold chain infrastructure Long intermediation chain

Indian consumers Restricted retail growth Growth of small, onestore formats, with unmatchable cost structure Wastage of almost 20 percent-25 percent of farm produce. Difficult to find good real estate in terms of location and size High land cost owing to constrained supply Disorganised nature of transactions Limited product range Makes scaling up difficult High cost and complexity of sourcing & planning Lack of value addition and increase in costs by almost 15 percent

Private Client Group

20

BLB Research Research A Passion

Factors Complex Taxation System Description
Differential

Money Look

Implications
Added cost and complexity of

Multiple Legislations

Customer Preferences

sales tax rates across states - Multi-point octroi Sales tax avoidance by smaller stores Stringent labor laws governing hours of work, minimum wage payments Multiple licenses/clearances required Local consumption habits - Need for variety Cultural issues

distribution Cost advantage for smaller stores through tax evasion

Limits flexibility in operations Irritant value in establishing

chain operations; adds to overall costs

Leads to product proliferation Need to stock larger number Increases complexity in sourcing

of SKUs at store level

Availability of Talent

Highly educated class does not

Manufacturers Backlash

consider retailing a profession of choice Lack of proper training No increase in margins

& planning - Increases the cost of store management Lack of trained personnel Higher trial and error in managing retail operations Increase in personnel costs Manufacturers refuse to disintermediate and pass on intermediary margins to retailers

Private Client Group

21

BLB Research Research A Passion Investment Universe

Company CMP (in Rs.) EPS 07 A (in Rs.) EPS 08 E (in Rs.) EPS 09 E (in Rs.) EPS 10 E (in Rs.) P/E 07 P/E 08 P/E 09 P/E 10

Money Look

Target

Recommendation

Pantaloon Trent Shoppers Stop Provogue

659 533 511 995

8.18 22.39 6.94 10.02

14.12 19.87 9.98 13.14

22.59 25.84 13.97 19.71

36.14 33.59 19.56 29.57

80.67 23.83 73.65 99.31

46.72 26.84 51.26 75.75

29.20 20.65 36.61 50.50

18.25 15.88 26.15 33.67

903 839 488 739

Buy Buy Buy on dips Buy on dips

Vishal

690

13.64

23.69

28.42

34.12

50.64

29.15

24.29

20.24

853

Buy

Koutons

721

12.62

16.48

26.38

42.20

57.18

43.76

27.35

17.09

1,055

Buy

Private Client Group

22

BLB Research Research A Passion

BLB Research Research A Passion
BSE Code: 523574 NSE Code: PANTALOONR Bloomberg Code: PF@IN Reuters Code: PART.BO Group: Pantaloon Face Value: Rs. 2/CMP: Rs. 659 52 Week (H/L): Rs. 720/296 M Cap (Rs. mln): 9,913.13 Cr Outstanding Shares: 15.07 Cr

Money Look

Initiating Coverage Pantaloon Retail (India) Ltd.

Recommendation: BUY

Company Background
Pantaloon is founded in 1987 as a garment manufacturing company, the company forayed into modern retail in August 1997 with the launch of its first department store, Pantaloons in Kolkata. It has established its retail presence across the major cities, managing the aggregate retail space of 6 million square feet.

Investment Rational
Pantaloon is widely known for its brands, launched the Indias first formal trouser brand; a formal shirt brandJohn Miller and Retail formats like Pantaloon Shoppe, a franchisee format to distribute branded garments; Big Bazaar, Indias First Hypermarket chain; Food Bazaar, the Supermart chain in food and grocery segment; Malls like Central and Kshitij and specialty formats like Fashion Station and aLL and various other multiple retail formats such as Collection i, Furniture Bazaar, Shoe Factory, Ezone, Depot, and futurebazaar.com across the nation. Indias leading retailers operating over 6 million square feet of retail space across 48 cities in India. Net sales of the company for the quarter ended Sept FY08 registered a growth of 77 percent at Rs 1019.64 crore. The company caters to the Lifestyle segment through its 31 Pantaloons stores and 4 Central Malls, as well as its other concepts. In Value retailing it is present through 78 Big Bazaar hypermarkets and 106 Food Bazaars, and other delivery formats. Forayed into new businesses in capital, consumer finance, insurance, media, logistics, and newer brands through its subsidiary companies. Plans to spend Rs. 800 Crore to have 10-11 million sq. ft space for the year ending June FY08. Home solutions Segment will most likely break even this year, and will affect bottomline going forward. The company holds 74 percent in future capital holding, which is coming out with Intial Public Offering and expected to possible value unlocking of investment.

Shareholding Pattern
Shareholding Pattern

10.75%

25.33%

43.47% 8.14% 0%

12.32%

F o re ign No n P ro m o te r C o rp. Ho ld. P ro m o te rs

Ins titutio ns Go vt Ho lding P ublic & Othe rs

Pantaloon Retail vis--vis Bse Sensex

Share Price Performance

3.00 2.50 2.00 1.50 1.00 0.50 0.00
May-07 Jun-07 Jul-07 Aug-07 Sep-07 Oct-07 Nov-07

Close Price

BSE_SENSEX

Private Client Group

23

BLB Research Research A Passion Concern

Money Look

In lieu of competition from international retail players with established Brands can be a threat. Various Industrial Group have entered into the Retail arena. Real Estate will going to be a scarce resource going forward. Maintenance of economies of scale is a challenge. Customer Loyalty will drive the business revenue.

Valuation
The stock is trading at Rs.659 discounting FY10E earnings by P/E(x) of 18. The earning is expected to grow at a CAGR of 64 percent for FY07A-FY10E. We initiate buy on the stock with a target price of Rs. 903. (Rs. in million)
Year 2006A 2007A 2008E 2009E 2010E Equity 268.85 293.50 301.50 301.50 301.50 Net Sales 18,677.71 33,256.11 53,209.78 85,135.64 136,217.03 EBIDTA 1,462.38 3,076.22 3,192.59 5,108.14 8,173.02 PAT 641.58 1,199.92 2,128.39 3,405.43 5,448.68 EPS (Rs) 4.77 8.18 14.12 22.59 36.14 P/E 138.20 80.67 46.72 29.20 18.25

(Source: Company, BLB Research)

Private Client Group

24

BLB Research Research A Passion

BLB Research Research A Passion
BSE Code: 500251 NSE Code: TRENT Bloomberg Code: LAKMEW@IN Reuters Code: TREN.BO Group: TATA Face Value: Rs. 10/CMP: Rs. 533 52 Week (H/L): Rs. 883/475 M Cap (Rs. in mln): 1,034.02 Cr Outstanding Shares: 1.94 Cr

Money Look

Initiating Coverage

Recommendation: BUY

Trent Ltd. Company Background

Established in 1998, Trent operates some of the nation's largest and fastest growing retail store chains with Westside, a lifestyle retail chain, which was followed up in 2004 with Star India Bazaar, a hypermarket with a large assortment of products at the lowest prices. In 2005, it acquired Landmark, India's largest book and music retailer.

Shareholding Pattern
Shareholding Pattern
9.45% 31.74% 20.39%

Investment Rational
Trent is carrying on the business of retailing of readymade garments for men, ladies and children, household and gift items, footwear, accessories, toys etc., under the name Westside and mass retailing under the name STAR INDIA BAZAAR. In a short span of 8 years Westside has positioned itself as one of the leading organised apparel retailers in India taking the shortest time to break even in the organised apparel retail sector in India. The company has expanded its Westside Stores in the major metros and mini-metros of India, and has its presence in 14 cities and is spread across all the 5 regions. In a period of 8 years, not only has the number of markets addressed increased from 2 to 14, but the product offering in each market has also increased. The number of product categories has increased from 5 to 21; the number of SKUs offered has increased from 11,000 to 60,000.

32.22%

0% 6.20%

F o re ign No n P ro m o te r C o rp. Ho ld. P ro m o te rs

Ins titutio ns Go vt Ho lding P ublic & Othe rs

Trent vis--vis Bse Sensex

Share Price Performance

3.00 2.50 2.00 1.50 1.00 0.50 0.00

May-07

Concern
Trent is dealing in Apparel segment which is seasonal in nature. The verticals Trent is operating are trend-based which exaggerates the risk. High level of risk prevails due to ample level of competition in the apparel segment.

Jun-07

Jul-07

Aug-07

Sep-07

Close Price

BSE_SENSEX

Private Client Group

Oct-07

25

BLB Research Research A Passion Valuation

Money Look

The stock is trading at Rs.533 discounting FY10E earnings by P/E(x) of 16. The earning is expected to grow at a CAGR of 14 percent for FY07A-FY10E. We initiate buy on the stock with a target price of Rs. 839. (Rs. in millions)
Year 2006A 2007A 2008E 2009E 2010E Equity 144.28 157.61 194.94 194.94 194.94 Net Sales 3,464.41 4,557.80 7,748.26 10,072.74 13,094.56 EBIDTA 441.04 642.29 852.31 1,108.00 1,440.40 PAT 251.28 352.86 387.41 503.64 654.73 EPS (Rs) 17.42 22.39 19.87 25.84 33.59 P/E 30.63 23.83 26.84 20.65 15.88

(Source: Company, BLB Research)

Private Client Group

26

BLB Research Research A Passion

BLB Research Research A Passion
BSE Code: 532638 NSE Code: SHOPERSTOP Bloomberg Code: SHOP@IN Reuters Code: SHOP.BO Group: K. Raheja Face Value: Rs. 10/CMP: Rs. 511 52 Week (H/L): Rs. 785/442 M Cap (Rs. in mln): 1,778.28 Cr Outstanding Shares: 3.48 Cr

Money Look

Initiating Coverage Recommendation: BUY ON DIPS Shoppers Stop Ltd.

Company Background
Since its inception in 1991, Shoppers Stop Ltd., which was founded by the K Raheja Corp. Group (Chandru L Raheja Group), one of the leading players in the country is in the business of real estate development and hotels, has been offering premium and luxury value for the entire family.

Investment Rational
Shoppers Stop is a chain of varied retail format stores in fashion and lifestyle segment of home dcor, books, cafes and high-end lifestyle merchandising. International and domestic brands across categories such as apparel, accessories, cosmetics, home & kitchenware as also its own private brands. It was been running customer loyalty program, First Citizen Club having beyond 9 lacs members. Well-Diversified Retail player is foraying into chain catalogue retailing under the name Agros in association with Home Retail group, UK. Manages its own logistics through well scattered distribution houses across all major cities. Customer entry increased by 29 percent to 12.29 million in the quarter ended Sep 07. Transaction size increased by 11 percent to Rs 1,619 and Average Selling Price was up 4 percent at Rs 670 on a y-o-y basis. Company has achieved breakeven at store level for Timezone Entertainment and Mothercare is expected to break-even by the quarter ending June 08.

Shareholding Pattern
Shareholding Pattern
4.43% 15.29% 9.39% . 66.16%
F o re ign No n P ro m o te r Co rp. Ho ld. P ro m o te rs Ins titutio ns Go vt Ho lding P ublic & Othe rs

4.72% 0%

Shoppers Stop vis--vis Bse Sensex

Share Price Performance
3.00 2.50 2.00 1.50 1.00 0.50 0.00
May-07 Jun-07 Jul-07 Aug-07 Sep-07 Oct-07

Concern
Conversion ratio dropped to 25 percent as compared to 28 percent in the same period last year. Private Labels contribute around 21 percent of total revenue. The apparel segment is affected by seasonability. Majorily into lifestyle segment and ignores the entry into food retailing. Presently placed in Tier 1 and metro cities only which exposes the revenue to geographical concentration.

Close Price

BSE_SENSEX

Private Client Group

27

BLB Research Research A Passion Valuation

Money Look

The stock is trading at Rs.511 discounting FY10E earnings by P/E(x) of 26. The earning is expected to grow at a CAGR of 41 percent for FY07A-FY10E. We initiate buy on the stock with a target price of Rs. 488. (Rs. in millions)
Year 2006A 2007A 2008E 2009E 2010E Equity 343.83 348.27 348.51 348.51 348.51 Net Sales 5,881.86 8,279.76 11,591.66 16,228.33 22,719.66 EBIDTA 565.82 716.61 927.33 1,298.27 1,817.57 PAT 271.05 241.85 347.75 486.85 681.59 EPS (Rs) 7.88 6.94 9.98 13.97 19.56 P/E 64.88 73.65 51.26 36.61 26.15

(Source: Company, BLB Research)

Private Client Group

28

BLB Research Research A Passion

BLB Research Research A Passion
BSE Code: 532647 NSE Code: PROVOGUE Bloomberg Code: PROV@IN Reuters Code: PROV.BO Group: Provogue Face Value: Rs. 10/CMP: Rs. 995 52 Week (H/L): Rs. 1,100/211 M Cap (Rs. in mln): 1,890.50 Cr Outstanding Shares: 1.90 Cr

Money Look

Initiating Coverage Recommendation: BUY ON DIPS Provogue (India) Ltd.

Company Background
Provogue operates in two core segment: designing, manufacturing and selling of branded ready segment garments and accessories under the brand, Provogue which has been positioned as a fashion label in Indian Domestic Market along with exporting finished fabrics, dyestuffs, chemicals and textile machinery to several markets in the African continent.

Shareholding Pattern
Shareholding Pattern

Investment Rational
Has evolved from being a pure fashion retailer to an integrated retail business. Its now about Brands, Retail Formats and Retail Infrastructure. Entered into a Joint Venture (JV) with Liberty International Plc, a UK FTSE-100 company with assets of 8.2 billion pounds. Provogue brand is available in more than 100 stores and 65 shop-in-shops in 56 cities across the country. Operates its own warehousing, quality control, packing and distribution facility in Tatapur, Mumbai. The company does in-house manufacturing which saves huge costs. Prozone Enterprises, subsidiary engaged in the business developing retail infrastructure like Malls and shopping centers in collaboration with UKs Liberty Plc has opened its first mall in Aurangabad spreading around 1 million square feet, having plans to explore retail formats in Tier 2 and Tier 3 cities.

17.58%

26.05%

4.71% 43.59% 8.07% 0%

F o re ign No n P ro m o te r C o rp. Ho ld. P ro m o te rs

Ins titutio ns Go vt Ho lding P ublic & Othe rs

Provogue vis--vis Bse Sensex

Share Price Performance
3.00 2.50 2.00 1.50 1.00 0.50 0.00
May-07 Jun-07 Jul-07 Aug-07 Sep-07 Oct-07

Concern
Company's inability to set trends and understand changing fashion styles, which can lead to lower sales and profitability. Since National Presence is a success mantra, the company needs to regionally penetrate.

Close Price

BSE_SENSEX

Private Client Group

29

BLB Research Research A Passion Valuation

Money Look

The stock is trading at Rs.995 discounting FY10E earnings by P/E(x) of 33. The earning is expected to grow at a CAGR of 43 percent for FY07A-FY10E. We initiate buy on the stock with a target price of Rs. 739. (Rs. in millions)
Year 2006A 2007A 2008E 2009E 2010E Equity 161.98 190.98 190.98 190.98 190.98 Net Sales 1,564.08 2,390.24 3,585.36 5,378.04 8,067.06 EBIDTA 208.93 337.49 501.95 752.93 1,129.39 PAT 119.43 191.45 250.98 376.46 564.69 EPS (Rs) 7.37 10.02 13.14 19.71 29.57 P/E 135.02 99.31 75.75 50.50 33.67

(Source: Company, BLB Research)

Private Client Group

30

BLB Research Research A Passion

BLB Research Research A Passion
BSE Code: 532867 NSE Code: VISHALRET Bloomberg Code: VISH@IN Reuters Code: VIRL.BO Group: Vishal Face Value: Rs. 10/CMP: Rs. 690 52 Week (H/L): Rs. 814/472 M Cap (Rs. in mln): 1,538.70 Cr Outstanding Shares: 2.23 Cr

Money Look

Initiating Coverage Vishal Retail Ltd.

Recommendation: BUY

Company Background
Vishal Retail was incorporated on July 23, 2001 as Vishal Retail Private Limited as a retailer of ready-made apparels in Kolkata in 2001. The company has acquired the business of 'M/s The Vishal Garments' and 'M/s Vishal Garments' in 2001. In 2003, the company has acquired the manufacturing facilities from Vishal Fashions Private Limited and M/s Vishal Apparels.

Shareholding Pattern
Shareholding Pattern

Investment Rational
Vishal Retail sells ready-made apparels (including its own brands) and a wide range of household merchandise and other consumer goods such as footwear, toys, watches, toiletries, grocery items, sports items, crockery, gift and novelties. Vishal is value retail company catering to middle and lower middle income groups. As Apparel segment contributes 63 percent, it has plans to focus more on FMCG. To reduce cost, Vishal does in-house production of apparels, procurement of goods directly procurement of goods from the small and medium size vendors and manufacturers. Efficient Logistics and distribution system along with customized product mix at stores depending on the regional customer behavior and preferences. Plans of penetrating deeper into Tier 1 and Tier 2 cities to bank upon early mover advantage, where organised retail is yet to make a significant mark, which will help establish and build customer loyalty prior to other players. Higher margins of around 5-6 percent in private labels which account for 10 percent of sales in FY07.

8.13%

6.95% 3.2% 0% 17.79%

63.93

F o re ign No n P ro m o te r C o rp. Ho ld. P ro m o te rs

Ins titutio ns Go vt Ho lding P ublic & Othe rs

Vishal Retail vis--vis Bse Senensex

Share Price Performance
3.00 2.50 2.00 1.50 1.00 0.50 0.00
Jul-07 Aug-07 Sep-07 Oct-07 Nov-07

Close Price

BSE_SENSEX

Private Client Group

31

BLB Research Research A Passion Concerns

Money Look

Since apparel compromises the large chunk of revenue, the risk of competition and seasonability needs to be overcome. High attrition rate of around of 35 percent. Benefits of demographic changes like increase in income level is yet to be untapped among urban population, but the company has been establishing in various Tier 1 and Tier 2 cities.

Valuation
The stock is trading at Rs. 690 discounting FY10E earnings by P/E(x) of 20. The earning is expected to grow at a CAGR of 35 percent for FY07A-FY10E. We initiate buy on the stock with a target price of Rs. 853. (Rs. in millions)
Year 2006A 2007A 2008E 2009E 2010E Equity 164.90 183.20 183.20 183.20 183.20 Net Sales 2,884.42 6,026.52 10,847.74 13,017.28 15,620.74 EBIDTA 269.90 693.40 1,193.25 1,431.90 1,718.28 PAT 124.70 249.80 433.91 520.69 624.83 EPS (Rs) 7.56 13.64 23.69 28.42 34.12 P/E 91.30 50.64 29.15 24.29 20.24

(Source: Company, BLB Research)

Private Client Group

32

BLB Research Research A Passion

BLB Research Research A Passion
BSE Code: 532901 NSE Code: KOUTONS Bloomberg Code: NA Reuters Code: KRIL.BO Group: DPS Kohli Face Value: Rs. 10/CMP: Rs. 721 52 Week (H/L): Rs. 810/415 M Cap (Rs. in mln): 2,199.05 Cr Outstanding Shares: 3.05 Cr

Money Look

Initiating Coverage Koutons Retail India Ltd.

Recommendation: BUY

Company Background
Koutons Retail desins, manufacturers and retail apparels under the brand name Koutons and Charlie Outlaw as having 18 in-house manufacturing and finishing facility in and around Gurgaon.

Investment Rational
Having presently 999 Exclusive Brand Outlets (EBO) and planned 140 EBO by 2009. Topline has grown by 154 percent over the year in FY07. Considerable PAT Margin of around 8.57 percent. Aggressive plans to expand in women apparel and kids wear at a large scale. Concentrated into Tier 1 and Tier 2 cities. Companys Brands are well recognized in middle income level segment and most of socio-economic segments. Being majorly into franchisee owned and operated outlets does not attract huge capital expenditure.

Shareholding Pattern
Shareholding Pattern
4.67% 16.89% 10.9% 0.36% 0.55% 66.63%

F o re ign No n P ro m o te r Co rp. Ho ld. P ro m o te rs

Ins titutio ns Go vt Ho lding P ublic & Othe rs

Koutons Retail vis--vis Bse Sensex

3.00 2.50 2.00 1.50 1.00 0.50 0.00

Concern
Geographic concentration of around 65-70 percent in Northern India. Banking upon only two brands does not fetch rich valuations. Process Integration can be hampered due to any inefficiencies in logistics and supply chain management arising because of being outsourced. Apparel is seasonal and highly competitive segment. Over dependence on Franchisee model may risk revenues.

Share Price Performance

Oct-07

Oct-07

Oct-07

Nov-07

Close Price

BSE_SENSEX

Private Client Group

Nov-07

33

BLB Research Research A Passion Valuation

Money Look

The stock is trading at Rs. 721 discounting FY10E earnings by P/E(x) of 17. The earning is expected to grow at a CAGR of 49 percent for FY07A-FY10E. We initiate buy on the stock with a target price of Rs. 1,055. (Rs. in millions)
Year 2006A 2007A 2008E 2009E 2010E Equity 49.90 273.40 273.40 273.40 273.40 Net Sales 1,583.50 4,024.00 6,438.40 10,301.44 16,482.30 EBIDTA 256.70 715.00 1,094.53 1,751.24 2,801.99 PAT 132.20 344.90 450.69 721.10 1,153.76 EPS (Rs) 26.49 12.62 16.48 26.38 42.20 P/E 27.23 57.18 43.76 27.35 17.09

(Source: Company, BLB Research)

Private Client Group

34

BLB Research Research A Passion

Money Look

RESEARCH TEAM
P. N. Panda Amit Kumar Tiwari Deepika Bhatia Jagvir Singh Faujdar Jaisheel Garg Lalit Chaudhary Nidhi Parvani Sachin Bansal Sameer Randive Samyukt Agrawal Head Research Media & Entertainment Retail Banking Power Hospitality Metals FMCG IT, Telecom Infrastructure [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] 011-233527459 011-233527459 011-233527459 011-233527459 011-233527459 011-233527459 011-233527459 011-233527459 011-233527459 011-233527459

Disclaimer:
1.

2.

3.

4.

5. 6. 7.

This document is for the personal information of the authorized recipient and does not construe to be any investment, legal or taxation advice to you. BLB Limited (hereafter referred as BLB) is not soliciting any action based upon it. This document is not f or public distribution and has been furnished to you solely for your information and should not be reproduced to any other person in any form. This document is provided for assistance only and is not intended to be and must not alone be taken as the basis for an investment decision. Nothing in this document should be construed as investment or financial advises, and nothing in this document should be construed as an advice to buy or sell or solicitation to buy or sell the securities of companies referred to in this document. The intent of this document is not in recommendary nature. Each recipient of this document should make such investigations as it deems necessary to arrive at an independent evaluation of an investment in the securities of companies referred to in this document (including the merits and risks involved), and should consult its own advisors to determine the merits and risks of such an investment. The investment discussed or views expressed may not be suitable for all investors. The report is based upon information that we consider reliable, but we do not represent that it is accurate or complete, and it should not be relied upon such This report has been prepared on the basis of information, which is already available in publicly accessible media or developed through analysis of BLB. The views expressed are those of analyst and the Company may or may not subscribe to all the views expressed therein. BLB or its Directors or any of its affiliates or employees shall not be in any way responsible for any loss or damage that may arise to any person from any inadvertent error in the information contained in this report. BLB or its directors or any of its affiliates, or employees do not provide, at any time, any express or implied warranty of any kind, regarding any matter pertaining to this report, including without limitation the implied warranties of merchantability, fitness for a particular purpose, and noninfringement. BLB and/or its directors and/or its affiliates and/or employees or any of its affiliates may have interests/ positions, financial or otherwise in the securities or sectors mentioned in this report. No matter from this document should be reproduced or copied in any manner without the prior consent of BLB Limited. Neither BLB, nor its directors, employees, agents or representatives shall be liable for any damages whether direct or indirect, incidental, special or consequential including lost revenue or lost profits that may arise from or in connection with the use of the information.

Private Client Group

35