2010

SHOPPERS STOP

Girish Shetty

Mayank Upadhyay

Ravi S

Ravish Kumar

Sudha G

EQUITY RESEARCH REPORT

Contents
Outlook ......................................................................................................................................................... 3
Analysis of revenue driving factors for SSL ................................................................................................... 3
Competitors: ................................................................................................................................................. 4
Growth .......................................................................................................................................................... 5
Industry Analysis ........................................................................................................................................... 5
Assumptions.................................................................................................................................................. 6
Multiplier method description ...................................................................................................................... 7
DCF Valuation:............................................................................................................................................... 7

SHOPPERS STOP LIMITED

Outlook
Shoppers’ Stop (SS) is the leading department store company in India. SS enjoys a unique
advantage of having a strong presence in the niche department store segment, which is likely to
face limited competition from both foreign and domestic players. Based on the projections from
2011-2015, we have arrived at a Market price of Rs. 557 for Shoppers Stop Limited by the
discounted cash flow method. Contradicting its fundamental valuation this stock is undervalued
when compared to its peers (Relative valuation method). With its current market price of Rs. 646
there is an upside potential (as the industry is overvalued) and hence we recommend a BUY for
this stock for a short term. Though over the medium term when the market corrects this should
fall to reach its true value. The major factors for our recommendation are that we expect
Shoppers stop to benefit from store expansion and expect Shoppers Stop to benefit from its stake
in Hypercity in the future.

Analysis of revenue driving factors for SSL

Revenue per Square Feet:
We identified revenue per square feet (R/SQ) as the major driver for growth in the retail
industry. Total Gross floor area in the current year stands at 2.047 million and is forecasted by
the company to increase to 3.893 million by FY2014. With an existing revenue per square feet of
Rs. 7800 (FY2010), we expect the (R/SQ) to grow to Rs. 10,500 per square feet by 2015.

SHOPPERS STOP LIMITED

 Square Feet Area
4500
4000
3500
3000
2500
2000 Area
1500
1000
500
0
2006 2007 2008 2009 2010 2011 2012 2013 2014

Expansion:
The company is planning to add around 1 million sq ft in the next 30 months with 18 new stores,
and plans to open 10-12 new stores in FY11 which will add approximately 0.5 million sq ft. It
added four stores during the quarter. Also, during the quarter, around 97 thousand members were
added to First Citizen’s club, taking their total count to 1.7 million members. First Citizen
Members’ contribution reached 73% of the revenues this quarter.

Margins:

EBITDA margin in 2010 is 4.5% and is expected to improve to 10.23% by FY2015 E due to a
decrease in selling general and administrative expenses as compared to growth in Sales.

Competitors:
SSL’s revenue per square feet is Rs. 7800 for FY2010. It’s competitors Pantaloon Retail are
operating at Rs. 6111 per square feet and Trent has a revenue per square feet of Rs. 8428.
Pantaloon with a projected growth rate of 21% is expected to lead in sales growth by volume
followed by Shoppers Stop and Trent Limited.

SHOPPERS STOP LIMITED

Growth
Gross Sales both at chain level and for Like-To-Like stores showed an improvement as
compared to last year. The growth was 10% in gross retail turnover.

Sales (Like-to-like-growth)
25

20

15

10 Sales (Like-to-like-growth)

0
2004-05 2005-06 2006-07 2007-08 2008-09 2009-10

Industry Analysis
The two major revenue drivers for this sector will be consumer spending, and increase in
organized retailing.

Consumer Spending: Consumer spending is one of the major factors driving retail industry’s
revenue. Consumer spending has risen sharply by over 75% in the past four years.

Organized Retailing: Organized retail is which is currently at 5% is expected to grow by 40%

till 2013. The revenue from organized retail will see maximum contribution from format malls,
and branded retails stores.

SHOPPERS STOP LIMITED

 Industry Aggregate(in Rs Mn)
Particulars FY-2010
Net Sales 96086.07
Change 25.08
EBITDA 4837.95
Change 23.97
Depreciation 770.68
Interest 2030.87
Other Income 331.78
PBT 2368.18
Tax 493.3
Effective Tax rate 20.83
Reported PAT 1874.88
Change 34.4
Industy Market Cap 196250.7

Two major segments in this industry are: Grocery Retail, and Apparels.

Food & Grocery Retail: This segment contributes about 75% of revenues to the retail sector.
Capex of Rs 221 billion dollars has been planned for the segment.

Apparels: This is the second major revenue contributing sector for this industry. Clothing and
textiles contribute 9% and the rest 11% has been contributed by footwear, jewellery,
accessories, and cosmetics.

According to the company’s annual report 59% of the revenues are from apparels and the rest
41% are from groceries.

Assumptions

We have assumed that the terminal growth rate in the organized retail industry will be
5%. However the current growth rate is as high as 20% but as the competition in the
industry is increasing the growth rate in the coming years would subside. So, we have
taken the terminal growth rate to be 5% but have done modeling in a way so we can get
the share value for different growth rates.

Miscellaneous expenses are assumed to be increasing as inflation rate.

Legal expenses are also assumed to be increasing as per inflation.

SHOPPERS STOP LIMITED


All other expenses like insurance, rent and lease, housekeeping, electricity, conveyance,
packing materials, business conducting fees etc will all be variable expenses and will
vary as the total store size in square feet increases.

We have assumed the Inflation rate at 6%. Since the past 2 years, inflation has been on
the higher side at 8-10%. But considering the various steps adopted by the RBI to curb
inflation, we expect the inflation to stabilize at around 6 years for the next 5 years.

Risk free rate is taken from the 30 year government treasury bills issued in August 2010.

Risk premium was calculated based on the past 10 years NIFTY data

Multiplier method description

We did the valuation also by multiplier method where we have used the market capitalization per
square foot multiplier. We have taken the market capitalization per square feet of the competitors
and then calculated the weighted average value for the industry using which we found out the
market capitalization of shoppers stop. Dividing this value by the number of outstanding shares
of the company, we got the market value of the share for Shoppers Stop Limited at Rs. 791 per
Share.

DCF Valuation:
Revenue/Square feet has been identified as the key revenue driver for the company. The
company’s sales has been projected based on the planned increase square feet over the next few
years. The company plans to increase its square feet by 34%, 16%, 14%, and 12% over the next
four years from 2011 to 2014 respectively. The company’s cost of capital is 10.77% and this has
been used as the discounting rate. At these rates the company is valued at Rs. 557/share.

SHOPPERS STOP LIMITED

 Base
Year 2011 2012 2013 2014 2015
Revenue/Sqft 0.078707 0.083429 0.088435 0.093741 0.099365 0.105327
Total Square Feet 1964990 2633327 3054539 3474751 3894963 4167610
Total Income from
Sales 141583.8 219696 270127.6 325726.3 387024.3 438963
Total Expenditure 131014.2 184800.4 226785.4 273138 324307.6 367967.9
Depreciation 3102.54 3666.812 4361.278 5198.682 6193.676 7322.198
Net Operating Income 6966.39 15988.79 22664.81 29921.66 37822.06 43651.81
NOPAT 5328.592 12229.82 17336.31 22887.08 28930.1 33389.27
CAPEX 5866.17 8333.068 10245.94 12354.79 14679.83 16649.86
Inventory 14989.32 21292.77 26180.56 31569.15 37510.11 42543.96
Sundry Debtors 1090.9 1549.656 1905.382 2297.555 2729.929 3096.285
Other CA, Loans &
Advances 19416.56 27581.8 33913.24 40893.4 48589.08 55109.73
Current Liabilities 26966.03 38306.04 47099.26 56793.41 67481.29 76537.28
Provisions 790.2 1122.502 1380.175 1664.248 1977.44 2242.813
Operating WC 7740.55 10995.68 13519.76 16302.44 19370.38 21969.89
Chg in Operating WC -726.45 3255.13 2524.077 2782.687 3067.939 2599.505
FCF 3291.412 4308.439 8927.579 12948.28 17376 21462.1
PV OF FCF s 3889.414 7275.489 9525.874 11540.03 12867.48
Total PVs 263852.9
Total No of Shares 349.1434
Price/Share 557

SHOPPERS STOP LIMITED