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Should you go shopping for retail stocks now?


BHAVANA ACHARYA

Rising prices of food, fuel and other essential products saw consumers cutting back on apparel and jewellery spends. K. Ananthan

Retail stocks have been in party mode after foreign investment rules were notified. Tempted to load your portfolio with these stocks? Here is how you can choose the right ones.Persistent inflation, higher costs necessitating product price hikes have squeezed consumer spending.

September 29, 2012: Nineteen, twelve, ten, eight. These arent just random numbers but the percentage gains put up by retail stocks in a single day after the Government allowed foreign investment in multi-product retail. But while the stocks are up on hopes of foreign investment, all is not well with their current business. Retailers operating in India have, in recent quarters, seen inflation stifling demand, higher input prices and, for a few, glitches in store location and format. Therefore, while foreign investment in the organised retail sector could help the larger players, such benefits will accrue only over a longer term.

Reluctant consumer
Sales growth for 14 listed retail players has slowed from 23 per cent in the September 2011 quarter to 10 per cent by the June 2012 quarter. The primary factor hitting retail performance was the squeeze in consumer spending. Rising prices of food, fuel and other essential products saw consumers cutting back on apparel and jewellery spends. The vast unbranded market also played a role in drawing away consumers from organised retail. High interest rates did their part in increasing consumers monthly loan payouts, shrinking their disposable income. Last year, the October-December quarter saw a sharp decline in sales to 12 per cent. Players such as Kewal Kiran Clothing saw double-digit growth taper off to 2 per cent. Even behemoth Pantaloon Retail India saw flat sales in the period. While discount sales propped up figures for the March 2012 quarter, the fizz went out when the discount season ended.

Same-store sales slide


As Indian retailers are permanently in expansion mode, a good gauge of sustainable prospects for them is

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Business Line : Features / Investment World : Should you go shopping for ...

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same-store sales growth the growth in sales for stores that were open for at least a year. This is an indicator of consumer spending patterns. This figure for key retailers such as Trent, Shoppers Stop and Pantaloon has slowed sharply. Pantaloons lifestyle retail formats, for example, had a same-store sales growth of 11.4 per cent in the June 2011 quarter. This has dropped to 4.7 per cent in the June 2012 quarter. Trents Westside clothing chains 10 per cent figure for 2010-11 shrunk to 7.5 per cent for 2011-12. Reflecting a cautious consumer, food player Jubilant FoodWorks saw same-store sales growth plummet from 36 per cent in the June quarter last year to 22 per cent in the same quarter this year. Value retail too has not been spared. Shoppers Stops HyperCITY, its supermarket style retail format, has seen same-store sales dropping from 11 to 7 per cent in a years time.

Higher costs
While the consumer began to cut back, retailers were hit by higher costs. This necessitated product price hikes, further dampening consumer sentiment. For one, in Budget 2011-12, excise duty of 10 per cent was levied on branded apparel. In India, listed retail players are predominantly in the apparel space. Second, material prices went up raw cotton prices gained almost 30 per cent in the first part of the year before cooling off. This, again, called for further hikes in product prices, resulting in apparel sales taking a stiff beating. For jewellery players, rising gold prices too played spoilsport to consumer appetites. But operating margins for most retail players have been maintained, with collective operating margins at 8-10 per cent. Page Industries, Bata India, Jubilant FoodWorks, Pantaloon India, Provogue, Titan Industries and Trent, for example, have seen either marginal increases or steady operating margins over the past four quarters. For some retailers, heavy debt resulted in high interest costs. As a proportion of sales, interest costs for players such as Indian Terrain and Pantaloon shot up about three percentage points between the quarters ending June 2011 and 2012.

What slowed
Apparel has borne the brunt of the spending slowdown. For retailers in niche segments, the growth rates are still much better, even though the slowdown has hit them too. For instance, Page Industries, which operates in the premium innerwear market, benefits from the non-discretionary nature of its product line. For want of comparables, we stretched retail to cover companies that offer products or concepts directly to a consumer, such as Talwalkars Better Value Fitness. Specialised retail, evading, for the most part, the heavy debt and drag of hypermarket formats, posted better net profit margins at around 8 per cent. Diversified retailers Trent and Shoppers Stop faced trouble on their hypermarket formats Star Bazaar and HyperCITY.

Investment triggers
Since January this year, stocks of retail players have moved anywhere from 30 to 84 per cent. By that token, caution is called for in picking retail stocks. At this juncture, fresh investments in the retail sector can be put off, though current holdings can be retained. The following could spark a revival in the sector: One, lower interest rates: If more banks emulate the State Bank of India in cutting base rates, disposable incomes could expand, helping apparel and jewellery sales. It could also lower the sting of interest costs paid out on huge debts. Lower interest outgo will help Pantaloon, Provogue, and Talwalkar. Improving same-store sales growth, footfalls and conversion indicate a returning consumer sentiment. Two, the unfolding FDI story: This could bolster prospects of the diversified retailers, especially Pantaloon, which is in need of capital infusion. Hypermarket formats of Trent and Shoppers Stop hold the key to long-term performance. Three, retail players in niche segments such as jewellery, food and so on are rather better off, with their exclusive

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Business Line : Features / Investment World : Should you go shopping for ...

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product offerings, better operating and net margins, and healthier balance sheets. Four, companies with good liquidity and those with an ability to fund expansion are likely to fare better. On these counts, Shoppers Stop, Page Industries, Speciality Restaurants, Lovable Lingerie and TBZ are the better bets in this space. Read also: Will companies benefit from FDI? bhavana.acharya@thehindu.co.in Keywords: FDI in retail, retail stocks, percentage gains, multi-product retail, organised retail sector, long-term performance

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