India Equity Research | Retail Monthly Update

RETAIL
Liquidity management key to success February 11, 2009

Pantaloon Retail’s revenues grew 24% in Jan; SSS back in the positive
Priya Ayyar
Pantaloon Retail’s (PRIL) monthly sales showed some signs of improvement with a
+91-22-4063 5413
24% growth Y-o-Y against 14.6% in December and 4% in November. Value retail (VR)
priya.ayyar@edelcap.com
at INR 4.5 bn comprised 65.6% of total revenues and grew 21%, while lifestyle retail
(LR) at INR 1.7 bn grew 22% and accounted for 24% of revenues. Same store sales
(SSS) growth improved in the month with VR growing at 4% and LR at 12% after a
decline of 4% and 14%, respectively, in December. However, Home retail (HR) stayed
negative at 4%. The high SSS in LR is a surprise and in our opinion a result of
promotional offers.

PRIL expands further with addition of 0.2 mn sq ft

The company added four Big Bazaars (including Food Bazaars), five KB Fair shops and
two E-Zones in January, totaling to 0.2 mn sq ft. At a standalone level, 0.19 mn sq ft
space was added this month as against 0.3 mn sq ft in the past three months. The
total addition of space till date stands at 1.5 mn sq ft at the consolidated level and 1.2
mn sq ft at the standalone level. This is in line with our expectation of 1.9mn sq ft of
addition for the full year).

Funding constraints persist; liquidity management key to survival

All the organised retailers are currently hit by liquidity constraints with equity capital
drying up and their debt funding getting difficult to service. We believe in the next
twelve to eighteen months retailers who are able to manage their balance sheets most
efficiently and ensure sufficient liquidity in the business are best placed to tide over
the current consumption slowdown.

With retailers like Subhiksha and Vishal Retail facing cash shortages, we expect
expansion to take a back seat, and profitability and capital conservation (through
inventory management and downsizing of unprofitable stores) to gain prominence. We
expect value retailers with presence across consumption categories (like PRIL) to fare
better in such conditions.

Key developments in the sector

„ Subhiksha battling for survival; INR 3 bn needed to avoid collapse

„ Carrefour talking with Future Group for India entry

„ Trent to promote Inditex’s Zara stores in India

„ Shoppers Stop and Home Retail Group, UK, to wind up their catalogue retail
operations under the Hypercity-Argos brand

„ Cafe Coffee Day to manage Shoppers Stop’s BRIO, Desi Café; MoU signed

„ Birla Retail to shut unviable stores even as it continues to expand; recently ~50
unviable stores shut

„ FMCG firms cut credit exposure to modern-day retailers

„ Book and gift retailers beat slowdown; witness lower dip in revenues than food
and grocery retailers.

(The above highlights are based on news articles in leading dailies)

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Pantaloon Retail- monthly sales numbers improve; slowdown

concerns persist

PRIL revenues in Jan grow 24% ; YTD growth at 34%

Total revenues grew 24% to INR 6.9bn with value retail (VR) bringing up 65% of revenues,
lifestyle retail (LR) 24% and home retail (HR) the balance. This is an improvement over the
3.8% growth in November and 14.6% growth in December. VR grew 21%, LR 22%, and HR
grew 32.5%.

Chart 1: Total revenue growth at 24% Chart 2: VR grows at 21% and LR at 22%
8,500 150.0 150.0

6,800 120.0 120.0

(INR mn)

5,100 90.0 90.0

(%)

(%)
3,400 60.0 60.0

1,700 30.0 30.0

- 0.0 0.0

Dec-06

Dec-07

Dec-08
Apr-07

Apr-08
Aug-06

Aug-07

Aug-08
Feb-07

Feb-08
Oct-06

Oct-07

Oct-08
Jun-06

Jun-07

Jun-08
Mar-07

Mar-08
Dec-06

Dec-07

Dec-08
Jun-06

Jun-07

Jun-08
Sep-06

Sep-07

Sep-08

Total Total Revenue Growth VR % Y-o-Y LR % Y-o-Y

   
Source: Company reports, Edelweiss research

Same store Sales growth numbers improve, but pressures visible

The same store sales (SSS) growth improved in the month to 4% in VR and 12% in LR. HR
however continued with negative SSS at 4.3%. This is an improvement over the negative
SSS growth seen in December. However the growth numbers for VR are lower than the YTD
growth of 7.7%. The YTD growth in LR stands at 5.8% and 1.4% for HR.

Chart 3: SSS turn positive in VR Chart 4: Jump in LR SSS due to promotions

60.0% 45.0%

40.0% 30.0%

20.0% 15.0%

0.0% 0.0%

-20.0% -15.0%

-40.0% -30.0%
Dec-06

Dec-07

Dec-08
Apr-07

Apr-08
Aug-06

Aug-07

Aug-08
Feb-07

Feb-08
Oct-06

Oct-07

Oct-08
Jun-06

Jun-07

Jun-08
Dec-06

Dec-07

Dec-08
Apr-07

Apr-08
Aug-06

Aug-07

Aug-08
Feb-07

Feb-08
Oct-06

Oct-07

Oct-08
Jun-06

Jun-07

Jun-08

    
Source: Company reports, Edelweiss research

Edelweiss Securities Limited

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Space addition of 0.2 mn sq ft takes total space to 10.5 mn sqft

The company added 4 Big Bazaar’s (including Food Bazaars), 5 KB Fair shops and 2 E- Zones
in the month of Jan totaling to 0.2 mn sq ft. At a standalone level the space addition stood at
0.19 mn sq ft. This is an improvement over the addition of 0.3 mn sq ft in the last three
months. The YTD addition stands at 1.3 mn sq ft in line to meet our estimate of space
addition of 1.9 mn sq ft for FY09.

Food Bazaar gains principal share in FMCG sale through modern retail

Based on Nielson data, Food Bazaar’s (FB) share in FMCG products being distributed through
modern trade stands at 28% with its share in top 8 cities like Ahemdabad, Pune, Kolkatta,
Delhi-NCR, Mumbai is in the range of 35-49%. PRIL has 50% share in Pune and 48% in
Kolkata which imply a significant market share. In terms of the key categories FB has
maintained a consistent share between 20-33% and is also gaining share in categories like
refined edible oil, biscuits, packaged tea, beverages, packaged atta, noodles, washing
powders, soaps, skin creams, shampoo and toothpastes.

Table 1: Food bazaar gains principal share

Market MT:TT (%) FB:MT (%)
Ahmedabad 7.0 49.0
Bangalore 19.0 21.0
Hyderabad 28.0 13.0
Kolkata 6.0 48.0
Mumbai 19.0 35.0
Pune, 19.0 50.0
Delhi NCR 5.0 38.0
Chennai 13.0 4.0
Rest of India 3.0 26.0
All India 5.0 28.0  
 
December 2008
Categories MT:TT (%) FB:MT (%)
Refined Edible oils (%) 9.0 26.0
Washing Powders / Liquids 7.0 33.0
Biscuits 3.0 27.0
Skin Creams 6.0 29.0
Toilet Soaps 4.0 28.0
Beverages 8.0 22.0
PackagedTea 5.0 29.0
Shampoo 7.0 32.0
Chocolate 5.0 14.0
PackagedAtta 8.0 21.0
Others 5.0 29.0
All India 5.0 28.0  
Source: Company, Edelweiss research

Edelweiss Securities Limited

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Key takeaways from retail company December 2008 results

„ Slowdown in revenue momentum visible even in a festive quarter, with 24% growth Y-o-
Y and 2.5% decline Q-o-Q, on account of marked dip in footfalls. Industry reports peg
mall footfall decline at ~25%. SSS growth dipped sharply and turned negative for many
retailers.

„ Revenue per sq. ft (PSR) dipped for most retailers, with the exception of Shoppers Stop
(SSL). This signals declining volumes and limited lever of price increase.

„ Massive inventory liquidation experienced with rampant discounts and promotions. Non-
moving apparel inventory causes concern; likely inventory mark-downs in Q4.

„ Efforts at cost cutting yield EBITDA growth of 34% Y-o-Y and ~70bps improvement in
EBITDA margins. Rentals softened in Q3; however, future of planned malls uncertain.

„ Scarcity of capital and over dependence on debt funding adversely impacted margins and
scaled down expansion plans. PAT for the group declined 4.4% Y-o-Y.

(Included in the group are Pantaloon Retail (PRIL), Shoppers Stop (SSL), Vishal Retail (VRL), Koutons
Retail (KRL), and Titan Industries (Titan). Only PRIL and SSL are under our coverage).

Table 2: Revenue growth unimpressive

(INR mn) Dec-08 Dec-07 % grth Sep-08 % grth
Pantaloon Retail 15,257 12,268 24.4 15,112 1.0
Shoppers Stop 3,626 3,266 11.0 3,601 0.7
Koutons Retail 2,418 1,731 39.7 2,824 (14.4)
Titan Inds 10,240 8,024 27.6 10,888 (6.0)
Vishal Retail 3,555 3,017 17.8 3,583 (0.8)
Total 35,096 28,306 24.0 36,008 (2.5)
Source: Company, Edelweiss research

Table 3: PAT for group dips 4.4% Y-o-Y

(INR mn) Dec-08 Dec-07 % grth Sep-08 % grth
Pantaloon Retail 335 317 5.8 362 (7.4)
Shoppers Stop 5 8 (46.4) (183) (102.5)
Koutons Retail 131 123 6.5 196 (33.2)
Titan Inds 379 308 23.1 871 (56.5)
Vishal Retail 22 156 (85.9) 41 (46.3)
Total 872 912 (4.4) 1,287 (32.3)
Source: Company, Edelweiss research

Liquidity key concern for retailers; capital being conserved

Subhiksha’s cash crunch situation is just the first in the line of many more liquidity squeeze
examples to follow, in our opinion. With debt levels at the maximum and almost no cash in
the business, many retailers are in line to face a similar situation. A look at the numbers for
the period ending December 2008 shows that most retailers are highly levered and are
battling interest payments in the range of 11-14%. Interest expenses have impacted profits
significantly; despite a 35% EBITDA expansion, PAT has declined 4.4%.

Maintaining store inventory levels and meeting monthly expense is the topmost priority of the
companies. Towards the same, working capital cycles are being shortened and expansion
plans are being delayed or put on hold. PRIL has scaled down its expansion plans and VRL
has frozen addition of stores. SSL has indicated that new stores will be funded only by
internal accruals and expansion will be limited to that extent. Titan has, however, retained its
expansion plans, but is evaluating location and deal with developers minutely. We believe
that going forward the companies will have to undergo the painful process of getting their
balance sheet back in shape and this will prepare them for the revival in consumption.

Edelweiss Securities Limited

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Table 4: 9 month snapshot; interest costs impact PAT expansion

Revenue % Y-o-Y EBITDA % Y-o-Y PAT % Y-o-Y Int/sales Debt
PRIL 30,369 31.3 3,122 52.1 697 13.6 4.7 29,000
SSL 10,220 20.7 (19) NA (391) NA 2.0 2,700
VISH 18,252 166.0 2,260 165.0 383 26.0 6.4 7,650
KUTN 6,820 61.5 1,232 51.7 436 30.0 7.1 NA
TTAN 29,592 34.2 2,417 45.0 1,572 70.0 0.6 NA
Source: Company reports, Edelweiss research
Revenue, EBITDA, PAT and Debt numbers in INR Mn, others in %

Correct errors of past; manage growth better

An analysis of the annual accounts from FY05 to FY08 for PRIL, SSL, VISH, and KUTN shows
that the revenue growth for the group stands at 65%, PAT growth at 57%, but the TCE has
grown by 99% and inventory by 87%. The revenue growth has lagged the investment in
inventory in all cases as has the profitability. Stock turns have declined in the period,
inventory days have gone up with a lesser than proportionate increase in credit period and
the cash conversion cycle has resultantly increased. A large part of working capital has been
funded by debt due to minimal cash flows (due to expansion phase) and hence interest
burden has also steadily increased.

Chart 5: Revenue growth lags inventory growth Chart 6: Days inventory held on the rise
250.0% 400

200.0% 320
(Inventory days)

150.0% 240

100.0% 160

50.0% 80

0.0% 0
PRIL SSL VISH KUTN PRIL SSL VISH KUTN
TCE Inventory Revenue FY05 FY06 FY07 FY08
Note: Growth is CAGR over FY05-FY08 Source: Company reports, Edelweiss research

Chart 7: Interest coverage on the decline Chart 8: D/E below comfort levels
15.0 3.0

12.0 2.4

9.0 1.8
(x)

(x)

6.0
1.2

3.0
0.6

0.0
0.0
PRIL SSL VISH KUTN
PRIL SSL VISH KUTN
FY05 FY06 FY07 FY08
FY05 FY06 FY07 FY08
Note: KRLs raised equity in FY08, hence ratios is low Source: Company reports, Edelweiss research

Edelweiss Securities Limited

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Key developments in the sector: Monthly roundup

Liquidity concerns rampant

1. Subhiksha battling for survival; INR 3 bn needed to avoid collapse

„ Subhiksha’s operations are near standstill with the company facing severe liquidity
crunch that has held up store rentals, salary payments, and vendor payments for
close to three months.  
„ News reports have stated that 8‐10% of its stores may be closed and many 
relocated to save rentals.  
2. FMCG firms cut credit exposure to modern retailers

„ FMCG companies are squeezing their credit exposure to modern trade retailers from
30 days to 21 days or even 15 days.

„ Godrej has increased the frequency of supply to modern trade retailers from once a
week to two-three times a week to reduce credit exposure

International retailers still excited about India

1. Carrefour likely to tie up with Future Group for India entry

„ Europe’s largest retailer Carrefour seems to be in advanced talks with Future Group
for a joint venture to set up cash-and-carry outlets in India. This will be similar to
the agreement between Bharti group and Wal-Mart and the Tatas and UK’s Tesco.

„ The talks centre around creating an entity that will serve as a major supply-chain
entity for all Future Group store formats and enable the Indian company to
significantly cut costs.

2. Trent to promote Inditex’s Zara stores in India

„ Trent has recently announced the formation of a joint venture with the Inditex group
to develop and promote the company’s Zara stores in India. Inditex will hold 51%
stake in the joint venture with Trent holding the remaining 49%.

„ Inditex is a leading Spain-based fashion retailer with strong retail presence under
Zara, Pull and Bear, Massimo Dutti, Bershka, Stradivarius, Oysho, Zara Home and
Uterque brands. It has ~4,200 stores across 73 countries.

Focus on profitability and cost control

1. Shoppers Stop (SSl) signs MoU with Cafe Coffee Day (CCD) to run BRIO, Desi
Café

„ This will be a revenue-sharing model between both the parties, entailing conversion
of all existing outlets into CCD formats.

„ The day-to-day activities like managing the logistics and supply chain of individual
stores would also be taken care of by CCD.

„ This collaboration will enable SSI to save costs and concentrate on the retailing part
of its business.

2. Birla Retail to shut ~50 unviable stores and relocate stores at better rentals

„ To counter the ongoing slowdown Birla Retail is renegotiating rentals and shutting
down unviable stores.

„ The company plans to increase the share of private label in its stores to as much as
60% of the total merchandise for better margins.

Edelweiss Securities Limited

6
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Board: (91-22) 2286 4400, Email: research@edelcap.com

Naresh Kothari Co-Head Institutional Equities naresh.kothari@edelcap.com +91 22 2286 4246

Vikas Khemani Co-Head Institutional Equities vikas.khemani@edelcap.com +91 22 2286 4206

Shriram Iyer Head Research shriram.iyer@edelcap.com +91 22 2286 4256

Coverage group(s) of stocks by primary analyst(s): Retail

Pantloon Retail & Shoppers Stop

Recent Research

Date Company Title Price (INR) Recos

05-Feb-09 Retail Testing times ahead

Sector Update

29-Jan-09 Shoppers Margins improve, but 97 Sell

Stop revenue growth muted;
Result Update

21-Jan-09 Pantaloon Macro headwinds 162 Accum.

Retail dim outlook;
Result Update

15-Dec-08 Retail Collaborate to Tide over

tough times; Sector Update

Distribution of Ratings / Market Cap Rating Interpretation

Edelweiss Research Coverage Universe Rating Expected to

Buy Accumulate Reduce Sell Total Buy appreciate more than 20% over a 12-month period

Rating Distribution* 81 62 28 10 184

Accumulate appreciate up to 20% over a 12-month period
* 2 stocks under review / 1 rating withheld
Reduce depreciate up to 10% over a 12-month period
> 50bn Between 10bn and 50 bn < 10bn

Market Cap (INR) 66 51 67 Sell depreciate more than 10% over a 12-month period

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