Shoppers Stop - Shoppers Pause - Nirmal Bang

Shoppers Pause

The macro-economic slowdown has begun to reflect on same-stores sales growth rate of Shoppers Stop (SSL), which is expected to decline to 6% in 2HFY12 from an average 9% in 1HFY12. The slowdown comes at a time when the company is expanding at a fast pace, adding 11 stores during the 9MFY12 period. We believe SSL, on a standalone basis, would post a 3.5% fall in profit for FY12E at Rs727mn, but register 12.3% profit growth for FY13E. Our profit estimates, on a standalone basis, are below consensus estimates by 11% for FY12E and 25% for FY13E. Our target price for the stock is Rs243.

Slowdown in same-store sales growth: Same-store sales, which grew 18% in FY11 and 9% in 1HFY12, is expected to drop to 6% in 2HFY12, despite the festive season. This clearly indicates that slowdown in the economy has resulted in lower spending on discretionary items.

Store expansion spree to erode margins: SSL is setting up stores at a fast pace, adding 11 stores during the 9MFY12 period and is likely to open eight more stores in the next five quarters. The aggressive expansion comes at a time when sales slowdown is likely to erode the company's margins. We believe the EBITDA margin will decline 110bps to 7.7% by FY13E.

Subsidiary Hypercity in need of further investments: SSL has a 51% stake in hypermarket chain Hypercity, which has accumulated losses amounting to Rs2.8bn and is expected to post a further loss of Rs1.5bn over FY12-13E. SSL will have to infuse Rs750mn equity into Hypercity and provide further support by providing loans amounting to ~ Rs500mn over FY13E.

Policy paralysis hurts sector: There are multiple policy levers that can aid the growth of the retail sector. However, policy paralysis has deterred the implementation of Goods and Services Tax (GST), grant of industry status for retail business and permitting 51% foreign direct investment (FDI) in multi-brand and food retail. The sector also continues to suffer from other problems like multiple taxation, duplication of warehousing infrastructure, inadequate access to funds etc.

Valuation: We believe same-store sales growth has a significant bearing on SSL's share price. In the past three years, double-digit same-store sales gave the stock a higher P/E, but with same-store sales growth slipping to single-digit of late (6% in 2HFY12), we expect the stock to be de-rated by the market and decline further. Hypercity is likely to continue incurring losses and strain consolidated Balance Sheets for FY12 and FY13. Following declining same-store sales and contraction in margins by 110bps expected over FY11-13E on a standalone basis, and also sustained losses of Hypercity, we assign a Sell rating to the stock with a SOTP-based target price of Rs243, down 17% from the CMP.

Source : Equity Bulls

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