Maintain SELL on Shoppers Stop - Still not out of the woods! - HDFC Securities

Mr. Jay Gandhi, Institutional Research Analyst, HDFC Securities

STOP (while recovering) continues to be among the worst hit within our apparel universe, given its pre-dominant mall-based presence (~87% of stores). Topline recovery at ~71% was marginally better than expected (HSIE: 70%). Gross margin still remains lower than 3QFY20; improving sequentially though (GAAP: 38.6% vs HSIE: 37.5%). However, cost savings were lower than expected (Post IND-AS 116 Cost of retailing stood at 25.2% vs HSIE: 21%) as mean reversion in rental concessions and employee expenses outpaced topline recovery. We continue to remain circumspect on the longevity of the business as cost arbitrage between pure-play department stores and online platforms continues to shrink with each passing year. Maintain FY22/23 EPS estimates and SELL recommendation with an unchanged DCF-based TP of Rs. 175/sh.

3QFY21 highlights: Revenue declined 29% to Rs. 7.07bn (HSIE: Rs.6.96bn) as footfalls continued to recover from the wrath of COVID-19 (now 50% of 3QFY20). E-Comm initiatives continue to track well. (Up 3x YoY). GM (GAAP/Non-GAAP) declined to 404/120bp YoY to 38.6/32% (underpinnings: ~Rs 30mn inventory provision and higher discount on Private label). Reported EBITDA declined by 52% YoY to Rs 949 mn due to (1) GM contraction and higher-than-expected mean-reversion of rental concessions and employee expenses. Net losses stood at -Rs. 207mn (HSIE: -Rs. 34mn). Management intends to commence expansion plans by 2HFY22. The recent Rs. 3bn rights issue is likely to come in handy.

Outlook: Company remains debt-free (post the Rs. 3bn rights issue). We continue to remain circumspect on the longevity of the format (pure-play department stores) as their cost arbitrage vis-à-vis online platforms continues to shrink rapidly. This makes the former less competitive with time. Hence, we maintain our SELL recommendation on the stock with unchanged FY22/23 EPS estimates and DCF-based TP of Rs. 175/sh (implying 10x FY23 EV/EBITDA).

Shares of SHOPPERS STOP LTD. was last trading in BSE at Rs.202.15 as compared to the previous close of Rs. 204.35. The total number of shares traded during the day was 17348 in over 662 trades.

The stock hit an intraday high of Rs. 205 and intraday low of 198.05. The net turnover during the day was Rs. 3488742.

Source : Equity Bulls

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