Shoppers Stop (SHOP IN)

Retail
02 May 2011

QUARTERLY RESULTS UPDATE

Largely in-line results; HyperCITY a cash guzzler

Shoppers Stops standalone (SSL) results were largely in line with our above consensus estimates, but HyperCITY revenues disappointed. EBITDA margin expansion (90bps) benefitted from higher other operating income, but was still 20bps lower than our estimate. HyperCITY trimmed its EBITDA loss, but required further loans from Shoppers Stop Ltd to fund an increase in working capital. While we view the quarter as a mixed bag, there were several encouraging signs which make us retain our positive view: 1) SSL generated `297mn of free cash flows in FY11, 2) HyperCITYs EBITDA loss narrowed QoQ, despite lower revenues and 3) gross margin contraction for SSL was lower than expected. We upgrade the stock to Buy with a 12-month target price of `404.

Upgrade from Accumulate

BUY
Sector view: Overweight Sector relative view: Market perform TP:

`404 (16%)

CMP: `348

Revenues in line; gross margin contraction lower than expected

SSL reported net sales, EBITDA and net profit of `4.8bn, `374mn and `199mn, largely in line with our estimates of `4.8bn, `383mn and `182mn, respectively. Same-store sales (SSS) growth was 14%, driven by 4% volume growth and 10% average selling price growth. Gross margins contracted by 40bps YoY (versus our estimate of 80bps) despite lower bought-out inventory, lower private label mix and higher VAT rates (see Exhibits 5 and 6). The EBITDA margin expansion of 90bps YoY benefitted from higher other operating income, but was still 20bps lower than our estimate. Higher administration expenses (higher fuel and packaging cost) were identified by management as the key reasons.

Company data
Shares outstanding Market cap 52-wk high/low Avg. daily traded volume 82mn `29bn/US$0.65bn `396/176 0.03(mn shrs)

Shareholding pattern (%)

Promoter 68.2 FIIs 13.2 DII 6.3 Others 12.3

HyperCITY still a cash guzzler; improved operating performance a positive

HyperCITY revenues were below our estimates due to an impact from the cricket world cup in March, but encouragingly, the EBITDA at store level still turned positive. In 4QFY11, Shoppers Stop infused `288mn in HyperCITY to fund capex, working capital and losses in HyperCITY. Correspondingly, SSL debt increased by `471mn during the quarter. We expect another `550mn of cash to be infused by SSL into HyperCITY in FY12 to fund capex, working capital and losses in HyperCITY.

Performance (%)
YTD 12m 3m (2.4) 2.5 2.3 0.0 0.0 20.0 40.0 60.0 Absolute 80.0 0.3 60.6 73.8

-7.1

Outlook remains strong; Shoppers Stops free cash flows to rise further
We expect SSS growth for Shoppers Stop to remain in double digits, now driven by price increases in apparel (due to input costs and excise duty), with volume growth remaining flat to low single digits. We expect FY12 to see 17% revenue growth and 30% profit growth. SSLs free cash flows are expected to increase from `297mn in FY11 to `500mn in FY12.

1m (20.0)

Relative to Sensex

Share price movement

(`) 500 400 300 200 100 0

Valuation
Our SoTP-based valuation values Shoppers Stop using a 25x multiple on our standalone FY12 EPS at `385/share and HyperCITY, using 0.5x FY13 EV/sales at `19/share. Our FY11-13 EPS CAGR is 30%.

Mar-10

Oct-09

Feb-11

May-09

Dec-09

Yr-end March (` mn) Net sales Net profit EPS (Rs) RoCE (%) RoE (%) P/E (x) EV/EBITDA (x) P/BV (x)
Source: Alchemy Research, Company

FY09A 13,187 (637) (9.1) (4.9) (24.1) (38.3) 63.7 10.5

FY10A 14,780 502 7.2 14.4 18.5 48.5 23.7 7.9

FY11E 18,175 752 9.2 13.4 16.6 38.0 19.7 4.8

FY12E 21,339 976 11.9 13.2 15.1 29.3 16.2 4.1

FY13E 25,660 1,257 15.4 14.6 16.6 22.7 12.5 3.5

Sastha Gudalore +91 22 66399177 sastha.kumar@alchemyonline.com

Please refer to the last page for disclaimer and rating explanation.

Bloomberg Code ASSB <GO>

Aug-10

Nov-10

Apr-11

Jul-09

Jun-10

Financial summary

Shoppers Stop

Retail

Exhibit 1: Quarterly financial results

Net sales growth driven by SSS growth of 14%.

` mn Net sales

4QFY10 3,974

1QFY11 3,639

2QFY11 4,801

3QFY11 4,912

4QFY11 4,824

YoY growth (%) QoQ growth (%)

Gross profit

20 (0)
1,239

25 (8)
1,289

23 32
1,513

23 2
1,702

21 (2)
1,485

YoY growth (%) QoQ growth (%)

Gross profit margin
Gross profit margin contraction due to higher VAT and lower bought out inventory.

23 (14) 31 74 (504)
271

28 4 35 72 426
250

21 17 32 (34) (391)
382

18 12 35 (156) 313
515

20 (13) 31 (39) (387)

374

YoY change bps QoQ change bps

EBITDA

YoY growth (%) QoQ growth (%)

EBITDA margin expansion could have been higher but for higher admin expenses.

100 (41) 7 270 (463)

0

65 (7) 7 167 7
0

43 53 8 114 107
0

13 35 10 (95) 254
22

38 (27) 8 94 (274)
34

EBITDA margin

YoY change bps QoQ change bps

Other income

Other income is primarily interest from loans to HyperCITY.

YoY growth (%) QoQ growth (%)

Interest expenses

NM NM
33

NM NM
33

NM NM
40

NM NM
25

NM NM
31

YoY growth (%) QoQ growth (%)

PBT

(45) (25)
172

(40) (0)
153

(27) 21
269

(44) (38)
424

(6) 26
291

YoY growth (%) QoQ growth (%)

Provisions for tax

NM (40)
8

331 (11)
54

80 75
95

47 58
148

69 (31)
92

YoY growth (%) QoQ growth (%)

PAT

(71) (92)
164

417 569
100

226 77
174

39 56
276

1,049 (38)
199

YoY growth (%) QoQ growth (%)

Source: Alchemy Research, Company

NM (14)

297 (39)

44 73

43 59

21 (28)

Exhibit 2: SSS growth remains in double digits

Strong SSS growth continues

30 25 20 15 10 5 0 (5) (10) 1QFY07 3QFY07 1QFY08 3QFY08 1QFY09 3QFY09 1QFY10 3QFY10 1QFY11 3QFY11

Source: Alchemy Research, Company

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Shoppers Stop

Retail

Exhibit 3: Customer entry remains strong

9.0 8.0 7.0 6.0 5.0 4.0 3.0 2.0 1.0 0.0

Exhibit 4: ASP increase, the main driver of SSS growth

900 880 887

7.7 5.9

860 840 820 800 780 760 809

4QFY10

4QFY11

4QFY10

4QFY11

Source: Alchemy Research, Company

Source: Alchemy Research, Company

Exhibit 5: De-risking of inventory continues

60 50 40 % 30 20 10 0 Bought out Consignment/SOR 4QFY10
Source: Alchemy Research, Company

Exhibit 6: Private label contribution continues to drop

17.2 17.1

44

42

44

48

17.0 16.8 16.6 % 16.4 16.2 16.0 Concession 15.8 4QFY10

Source: Alchemy Research, Company

12

10

16.3

4QFY11

4QFY11

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Shoppers Stop

Retail

Financial statements and assumptions

Profit and loss account
Yr-end March (` mn) Net sales Raw materials Employee cost Other expenses Total expenditure EBITDA Other income Interest Depreciation PBT Total tax PAT Less: Adjustments Adjusted PAT FY09A 13,187 8,800 859 3,292 12,950 413 80 256 631 (395) (6) (637) (637) FY10A 14,780 9,843 876 3,170 13,888 1,110 63 224 310 638 154 502 502 FY11E 18,175 12,187 990 3,715 16,891 1,525 56 129 310 1,141 390 752 752 FY12E 21,339 14,370 1,162 4,209 19,741 1,863 117 129 373 1,479 503 976 976 FY13E 25,660 17,267 1,397 4,973 23,637 2,341 129 135 430 1,905 648 1,257 1,257

Ratios
Yr-end March Percentage of net sales Raw material costs Employee costs Total expenses EBIDTA PAT Asset-based ratios (%) RoCE RoE Turnover ratios (days) Debtor days Inventory days Creditor days Working capital days Growth ratios (%) Net sales EBITDA EPS CEPS Per share (Rs) EPS CEPS BV DPS Valuations (x) P/E P/CEPS P/BV Yield (%) EV/EBITDA EV/sales Solvency ratios Current ratio Quick ratio D/E ratio Interest coverage ratio FY09A 66.7 6.5 98.2 3.1 (4.8) (4.9) (24.1) 3 44 92 33 16.2 (25.9) (9.1) (0.1) 33.4 (38.3) (4153.0) 10.5 63.7 2.0 1.3 0.1 0.9 (0.9) FY10A 66.6 5.9 94.0 7.5 3.4 14.4 18.5 3 36 95 20 12.1 168.7 7.2 11.7 44.3 1.5 48.5 30.0 7.9 0.4 23.7 1.8 1.3 0.6 3.0 FY11E 67.1 5.4 92.9 8.4 4.1 13.4 16.6 3 30 81 23 23.0 37.4 27.7 11.5 9.2 13.0 73.2 38.0 26.9 4.8 19.7 1.7 1.5 0.2 6.5 FY12E 67.3 5.4 92.5 8.7 4.6 13.2 15.1 3 28 77 28 17.4 22.2 29.8 27.0 11.9 16.5 85.1 29.3 21.2 4.1 16.2 1.4 1.5 0.2 8.2 FY13E 67.3 5.4 92.1 9.1 4.9 14.6 16.6 3 27 74 30 20.3 25.7 28.8 25.1 15.4 20.6 100.3 0.2 22.7 16.9 3.5 0.1 12.5 1.1 1.6 0.2 0.2 10.0

Key assumptions
Yr-end March Same store sales growth (%) Gross margins (%) EBITDA margins (%) Net profit margin (%) Area expansion (msf) FY09A FY10A FY11E 17 33 8 4 0.33 FY12E 13 33 9 5 0.44 FY13E 8 33 9 5 0.39

Balance sheet
Yr-end March (` mn) Equity capital Reserves & surplus Net worth Minority interest Total debt Total Net block Capital WIP Total fixed assets Investments Net working capital Current assets Inventories Debtors Cash & bank Other current assets Current liabilities & provisions Creditors Other liabilities Provisions Net deferred tax assets Miscellaneous exp. Total FY09A 349 1,982 2,331 2,078 4,408 2,355 232 2,587 974 689 3,509 1,450 113 157 1,789 2,662 2,517 130 15 4,408 FY10A 349 2,433 3,089 1,914 5,003 2,710 277 2,987 1,197 744 3,550 1,499 109 30 1,911 2,776 2,608 88 79 46 5,003 FY11E 411 5,570 5,981 1,487 7,468 3,568 3,568 2,372 1,470 4,496 1,511 160 26 2,798 3,000 2,832 88 79 33 7,468 FY12E 411 6,546 6,957 1,637 8,594 4,198 4,198 2,622 1,650 5,166 1,775 192 91 3,108 3,425 3,257 88 79 33 8,594 FY13E 411 7,787 8,198 1,637 9,835 4,616 4,616 2,722 1,629 6,378 2,027 221 837 3,294 3,913 3,746 88 79 33 9,835

Cash flow statement

Yr-end March (` mn) PAT Add: Depreciation Add: Interest expense Less: Other income Change in working capital Others Cash flow from operations Change in fixed assets Change in investments Other income Others Cash flow from investing activities Change in debt Dividend & dividend tax Change in equity & share premium Interest paid Other adjustments Cash flow from financing activities Change in cash & cash equivalents Opening cash & cash equivalents Closing cash & cash equivalents
Source: Alchemy Research, Company

FY09A (637) 631 256 (80) 754 925 (815) (167) 80 (903) 348 1 (256) (17) 76 83 58 141

FY10A 502 310 224 (63) (54) 920 (710) (222) 63 (869) (164) (105) 18 (224) (46) (520) (162) 157 (5)

FY11E 752 310 129 (56) (726) 409 (891) (1,175) 56 (2,010) (427) 2,548 (129) 13 2,005 97 30 127

FY12E 976 373 129 (117) (180) 1,180 (1,003) (250) 117 (1,136) 150 (129) 21 65 26 91

FY13E 1,257 430 135 (129) 22 1,715 (848) (100) 129 (819) (16) (135) (151) 745 91 837

Source: Alchemy Research, Company

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Disclaimer Stop Shoppers

Retail

The ratings are based on the absolute upside of our target price from the current price.

Upside >25% Upside between 15% and 25% Upside up to 15% Downside up to 15% Downside >15%

Strong Buy Buy Accumulate Reduce Sell

Outperform Marketperform Underperform

Sector relative call >5% upside to sector benchmark +5% to -5% of sector benchmark >5% downside to sector benchmark

Sector weight Overweight Equal weight Underweight

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