Shanthi Venkataraman

Hoping to ramp up its presence in the metros.

INVESTORS can consider subscribing to the initial public offering of Shopper's Stop, the third retailer to enter the listed space.

We believe that, given the stiff valuations at the offer price, listing gains are likely to be modest. We think the stock would be reasonably valued at the lower end of the price band and would provide better scope for appreciation. At Rs 250, the upper end of the price band, the offer price values the stock at 45 times its earnings per share on the post-offer equity base. The valuation compares well with its peers — Pantaloon and Trent — which trade at multiples of 70 and 47 times respectively.

Retail stocks have enjoyed the market's fancy for several reasons — the growing acceptance and demand for organised retail, the possibility of FDI being permitted in the sector, the paucity of stocks available for investors who seek an exposure to the sector, to name a few.

We do believe that the retail sector is poised for explosive growth. Shopper's Stop would be among our preferred plays in the retail sector, even as the number of stocks in this space expands.

A leading departmental store in the country, the company enjoys bright prospects over the long term. Given its strong brand recall, the foray into newer catchment areas in cities where it already has a presence and the venture into more locations are likely to boost revenues. The principal risk to our recommendation pertains to a property in Bangalore that is under dispute. The property contributed about 10 per cent to the overall revenues in FY-04.

Any loss of title/ownership rights, therefore, would have an adverse impact on the company's operations. The high valuation would demand fairly high growth rates in profits and revenues over the next few years and the tolerance for any disappointment on this score may be low.

Also, any delay in expansion as envisaged in the offer, would impede revenue and earnings growth.

Forays into new formats

Departmental stores, which market a range of products such as apparel, accessories, footwear and home furnishings, is a well-established format in India.

Shopper's Stop also has a 51 per cent stake in the popular bookstore "Crossword" and has the option to raise its stake to 100 per cent before June 30. Though the bookstore now makes a loss, it is likely to be a significant contributor to revenues of Shopper's Stop.

The company also has the option to take a 51 per cent stake in Hypercity Retail, an outfit floated by its promoters for setting up `hypermarkets' or large discount stores in India. Its capabilities in this format are yet to be demonstrated and the company's likely foray into this area and the resultant impact on its operations have not been factored into our recommendation.

Penetrating the metros

For now, Shopper's Stop appears focussed on the departmental store format and is furthering its presence in the top cities, where there is greater propensity to spend.

Goods at Shopper's Stop come with a premium tag, with the average transaction size estimated at Rs 1,300. In Mumbai, it has six properties, and in Bangalore two.

Expansion in these cities also gives the company the opportunity to tap new catchment areas.

At the same time, it also means taking on stiff competition from departmental stores such as Lifestyle and Pantaloon, which are also expanding rapidly within the same metros.

Shopper's Stop has managed to cope with competitive pressures so far, having created a loyal customer base over the years. About half its revenues in FY-04 came from "First Citizens", members of its loyalty programme.

Poised for robust revenue growth

Shopper's Stop has seen a strong growth rate in recent years. In FY-2000 and FY-01, it reported losses for the first time since it began operations. During this period, the company was in the expansion mode; its technology and systems were not in place and it had also acquired `Crossword'.

The company, however, got its act together and posted a marginal profit in FY02. Since then, it has grown its topline by about 30 per cent annually, as it added two-three stores each year. Its profits jumped manifold to Rs 18.6 crore on a consolidated basis by 2004-05. Now, with its systems and format well established, Shopper's Stop is likely to stay on the growth trajectory. With increasing number of stores, the story for Shopper's Stop is going to be one of revenue growth driving profits. The company plans to add six stores in FY-06 and four in FY-07. The company has also identified 13 sites for expansion, which it plans to fund through internal accruals and debt.

As its promoters are in the real-estate business, the company is likely to be better placed than its competitors when it comes to identifying good properties and structuring real-estate deals.The new stores may, however, take some time before making significant contributions to profits. Depreciation, too, would be a strain on the bottomline in the near term. On the other hand, operational efficiencies, in terms of procurement and distribution, would kick in on expansion. Operating margins in FY-05 improved by about 90 basis points to 7.4 per cent.

A growing share of private labels also offers scope for improvement on the margins front. Private labels, such as STOP and Kashish, now account for about 20 per cent of its sales. The ability to improve its same-store sales, which measures the growth of its existing outlets, would be the key to improving the company's profitability.

Offer details: The company is offering 69.46 lakh shares, of which 55.55 lakh shares would be available to the public. The price band is Rs 210-250. The post-offer equity base would be Rs 34.36 crore. Of the offer size of Rs 170 crore, Rs 112 crore would fund expansion, Rs 15 crore would go towards renovation and expansion of existing stores, and Rs 80 crore to meet issue expenses. The balance would be used for general corporate purposes. The promoters' stake, post-issue, would be about 67 per cent.

The lead managers are Enam, JM Morgan Stanley and Kotak Mahindra Capital, and the registrar is Karvy Computershare. The offer opens on April 27 and closes on May 3.

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