Retail+Sector_Angel

Angel Broking Service Truly Personalized TM Industry Overview Retail Table of Contents Executive Summary Indian Retail Industry A $640bn opportunity by CY2010E Per Capita Income growth to drive spending Retail sales to grow on Private Final Consumption Expenditure PFCE Breakup - An indication of lifestyle change Organised Retail in India Exciting Investment Destination Organised Retail in India - At a Nascent stage High Growth Story - Good times ahead! Category Analysis - Bon Appetite? Not quite... Where Indian Buy? - Hypermarkets to drive growth Drivers of Growth Consumer or Demand - Side Drivers Increasing Disposable Income of Indian Middle class Demographics play for India - The Youngest Population Increase in Working population Reduced Dependency to drive Organised Retail Increase in Credit Cards Internet driving awareness & Online Purchasing Changing Consumer preferences & Dhopping Habits Retailer or Supply - Side Drivers Increased Investments in Retail Tier II & III cities to fuel future growth of Modern Retail Repealing Urban Land Ceiling Act Shortened Supply Chain a benefits consumers Challenges & Risks Acceptance of Organised Retail Supply Chain Inefficiencies Real Estate costs still high compared to global benchmarks Execution risks High Personnel costs Shrinkage Tale of Two Countries - India & China FDI Roadmap for Indian Retail is different from China FDI in Retail does not harm local players Growth to be fuelled by Big-Box stores and Hypermarts Retailing restricted to Big cities in China, unlike India Indian consumers similar to Chinese Consumer Credit growth to sustain Retail growth Conclusions and Our Expectations Outlook & Valuation Valuation Matrix Companies Pantaloon Retail (India) Ltd. Titan Industries Vishal Retail November 2008 January 30,28, 2008 2 6 6 6 7 8 9 9 9 10 10 12 14 14 14 14 15 16 16 17 18 18 18 19 20 21 22 22 22 23 23 24 24 25 25 26 27 27 27 27 28 32 34 38 58 72 For Private Circulation Only - - SebiRegistration No :: INB 010996539 For Private Circulation Only Sebi Registration No 1 Angel Broking Service Truly Personalized TM Industry Overview Retail Executive Summary ‘Value’ Retailing Indian Retail Industry is a derivative of the growing economy, changing demographics and preferences of the Indian consumers. Though effects of the global meltdown is evident in the Indian economy, the Nominal GDP is still expected to grow at around 12% in CY2009. We estimate that this economic growth, coupled with estimated growth of 7% in Private Final Consumer Expenditure (PFCE) over CY2008-10E, will drive growth of Total Indian Retail industry in line with GDP growth to reach US $640bn by CY2010. We estimate Organised Retail in India to grow at a CAGR of 35% over CY2008-10E to US $46bn. Growth lies in Organised Retail Organised Retail is expected to drive growth and constitute 5% of the Indian Retail Sector at the end of CY2008E.The change in consumer lifestyle is reflected in the change in PFCE over the years and this change is expected to continue due to growth in per capita income of the consumers. We expect Organised Retail to grow at a CAGR of 35% over CY2008-10E to US $46bn capturing 7.2% share of Total Retail Sales in India. Food & Grocery - The dominant category in Indian Retail The Food & Grocery (F&G) segment enjoys dominant marketshare of 75% of the Indian Retail Sector but has miniscule 1% penetration in Organised Retail. Thus, though F&G is the most attractive segment to expand into, Modern Retailers might not be able to match the cost structures of the Traditional Retailers. We estimate the F&G segment in India’s Organised Retail segment to grow at around 60% over FY2008-10E and believe that Retailers with low-cost formats would be more successful. Hypermarts to lead the Future growth in Organised Retail We expect growth of Modern Retail to be led by Hypermarkets and Big-Box stores. In FY2007, the fastest growing formats were the Wholesale Cash and Carry stores (150%) followed by Supermarkets (100%, albeit on a smaller base) and Hypermarkets (75-80%). We estimate the number of Hypermarts to be around 252 by CY2011, contributing around 1% to Total Retail Sales in India. In the US, Wal-Mart alone contributes around 7.8% of Total Retail Sales with the Top-10 Retailers constituting around 20% of Total Retail Sales there. In line with this, there exists plenty of headroom for Organised Retail growth in India, with Hypermarts, both domestic and global, at the forefront of growth. November 28, 2008 January 30, 2008 For Private Circulation Only - - SebiRegistration No :: INB 010996539 For Private Circulation Only Sebi Registration No INB 2 Angel Broking Service Truly Personalized TM Industry Overview Retail Drivers of Growth of Organised Retail in India The key Consumer or demand-side drivers of growth of Organised Retail in India are increase in disposable income, growing aspiring middle class segment, young population, working population of India, internet driving awareness and on-line purchases and change in consumer habits and preferences. The key Retailer or supply-side drivers include increase in investments in Retail, Tier-II and III cities, which would drive long-term growth of Organised Retail, and repealing of the Urban Land Ceiling Act would free more space for Retail expansion. Key challenges impeding the growth of Organised Retail in India The key challenges facing Organised Retail in India are acceptance of Organised Retail by the Traditional retailers (which is leading to tougher regulatory measures by the government), supply chain inefficiencies, high real estate costs, increasing personnel costs, high execution risks in terms of store rollouts and high shrinkage that hits Retailers' Bottom-lines. We believe that these challenges would result in Margin contraction for most players. However, increasing economies of scale and scope would result in savings for the Retailers and mitigate Margin contraction to a large extent. We believe that over FY2008-10E, Retailers who successfully tackle these impediments would be better placed to deal with the challenges posed by entry of Global Retailers when the Sector is opened to foreign investments. By then, we estimate that these Retailers would have taken up prime Retail locations across India and enjoy first mover advantages in terms of customer acquisition and brand building. Lessons from China India and China have been compared on every aspect of growth and we feel that there are few takeaways from the Chinese Retail story and few differences in path to Organized Retail growth between India and China. We believe that as China has shown, allowing FDI in the Retail Sector would not harm the local Organised players and will bring in the technological advances implemented in global Retail Industries. We feel that the Indian and Chinese consumers behave similarly in terms of product, category and format preferences. Hence, it is imperative for Indian Organised Retailers to have a look at the Chinese business model to take cues for successful November 2008 January 30,28, 2008 For Private Circulation Only - - SebiRegistration No :: INB 010996539 For Private Circulation Only Sebi Registration No 3 Angel Broking Service Truly Personalized TM Industry Overview Retail and stable growth. Angel Retail Top Pick, Pantaloon Retail, to grow in line with industry We Initiate Coverage on the Retail Sector in India with a positive outlook. We expect our Retail universe to clock strong CAGR of 32% and 34% in Net Sales and Net Profit respectively, over FY2008-10E. Pantaloon Retail India (PRIL) is our Top Pick in the sector as we believe that the company has competitive advantages over its peers in terms of its presence across consumption and price points of Indian consumers, has pan-India presence and lower execution risks. We have adopted the sum-of-the-parts (SOTP) methodology to arrive at the Target Price of Rs284 for PRIL, translating into an upside of 35% from current levels of Rs210. We have valued PRIL standalone on P/BV basis along with key subsidiaries Future Capital Holdings, HSRIL and Future Bazaar at a discount to current market capitalisation and stake sale basis, respectively. We Initiate Coverage on PRIL with a Buy recommendation. We are positive on VRPL’s scalable business model, which is focused on Tier-II and III value retailing. However, in the current environment, we believe VRPL’s Debt/Equity would rise going ahead to fuel its growth. Hence, we Initiate Coverage on VRPL with a Neutral recommendation. We like Titan Industries as its stable and niche business model will continue to deliver robust Return Ratios as has been the case in the past. We Initiate Coverage on Titan Industries with a Neutral recommendation owing to its rich valuation. Exhibit 1: Comparative Valuation Pantaloon Retail Parameters EPS (Rs) P/E (x) P/BV (x) EV/EBITDA (x) RoE (%) RoCE (%) CMP (Rs) Core Business (Rs) Subsidiaries (Rs) Target Price (Rs) Recommendation FY2008 7.9 26.6 2.7 11.8 8.6 11.5 FY2009E 9.9 21.2 1.9 8.6 8.2 11.3 210 218 66 284 Buy FY2010E 14.7 14.3 1.8 7.4 10.0 12.5 FY2008 33.2 28.1 9.3 17.9 37.7 32.7 Titan Industries FY2009E 41.0 22.8 7.1 14.5 35.3 33.1 932 Neutral FY2010E 52.7 17.7 5.4 11.6 34.6 31.7 FY2008 18.2 3.7 0.6 5.2 20.4 17.2 Vishal Retail FY2009E 15.4 4.4 0.5 5.1 11.9 14.6 68 Neutral FY2010E 21.0 3.2 0.4 4.5 14.3 16.2 November 28, 2008 January 30, 2008 For Private Circulation Only - - SebiRegistration No :: INB 010996539 For Private Circulation Only Sebi Registration No INB 4 Angel Broking Service Truly Personalized TM Industry Overview Retail Industry November 2008 January 30,28, 2008 For Private Circulation Only - - SebiRegistration No :: INB 010996539 For Private Circulation Only Sebi Registration No 5 Angel Broking Service Truly Personalized TM Industry Overview Retail Indian Retail Industry Indian Retail - A $640bn opportunity by CY2010E Indian Retail to grow at 13.2% over CY2007-CY2010E India is one of the largest and highly fragmented Retail markets globally having around 12mn retail outlets with the unorganised players accounting for market-share of 95%. In comparison, in the US Retail Industry, 85% of which is organised, around one million stores contribute revenues, which is 9x the Indian Retail market. Overall, the Indian Retail Industry, pegged at US $511bn by end of CY2008, is estimated to post CAGR of 13.2% in line with nominal GDP over CY2007-10E to US $640bn. Hence, we believe that Indian Retail has tremendous growth potential and that the Organised segment would attract investments up to US $25bn by CY2011E. Exhibit 1: Growth of Indian Retail Industry ( $ Bn) 700 Total Indian Retail Market CAGR of 13.2% 600 500 400 300 200 100 FY2007 FY2008 FY2009E FY2010E Source: GRDI 2008, Angel Research Per Capita Income growth to drive spending Long-term growth in per capita income to induce consumption During FY2004-08, the real per capita income growth averaged around 7.3%, which was higher than average Inflation of 5.1% during the period. This bodes well for Indian Retail as consumers are likely to spend more and stabilise their savings for future big-ticket purchases. We believe that long-term growth in per capita income will induce consumption Indian consumers that will result in growth of Indian Retail Industry. Exhibit 2: Per Capita Income, Consumption Growth trend Per Capita Income Growth (%) 9% 8% 7% 6% 5% 4% 3% 2% 1% 0% 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 Source: ICRIER Retail Report 2008, Angel Research Per Capita Consumption Growth (%) November 28, 2008 January 30, 2008 For Private Circulation Only - - SebiRegistration No :: INB 010996539 For Private Circulation Only Sebi Registration No INB 6 Angel Broking Service Truly Personalized TM Industry Overview Retail Retail sales to grow on the back of Private Final Consumption Expenditure 7% Real PFCE growth till CY2013E to aid consumption growth GDP growth and PFCE growth go hand-in-hand to drive growth of the Retail Industry. This is evident from the fact that Retail Sales grew at higher CAGR of 10.9% over CY2003-07 with GDP growth at 8.7% and real PFCE growth at 6.7%. This compares with the sluggish 4.8% growth in Retail Sales during CY2001-03 when GDP growth stood at 4.7% and Real PFCE grew by a mere 4%. Going ahead, Real PFCE is expected to grow at a CAGR of 7% over the next five years riding high on the back of robust growth of Indian economy. Exhibit 3: GDP, PFCE and Retail Sales Growth Real GDP Growth 13.6% 10.9% 8.7% 6.6% 5.7% 6.7% 4.7% 4.0% 4.8% Real PFCE Growth Retail Sales Growth 1994-95 to 1999-00 2000-01 to 2002-03 2003-04 to 2006-07 Source: ICRIER Retail Report 2008, Angel Research Indian Retail to drive growth from high levels of personal consumption of Indians Overall, in terms of Personal consumption as a percentage of GDP India is second only to Vietnam in Asia and a close fourth globally. Robust growth of Indian economy will result in increase in personal consumption as a percentage of GDP. According to IMA, Asia, India had one of the highest personal consumption as a percentage of GDP in Asia at around 55% in 2007.This portends well for Indian Retail as with per capita income growing, this personal consumption would translate into higher Retail Sales. Hence, India with one of the highest personal consumption as a percentage of GDP in Asia, seems to be a better and more opportunistic bet in the Retail Sector compared to China (~35%), Singapore (~45%), Hong Kong (~50%) and South Korea (~46%). Exhibit 4: Personal Consumption as a percentage of GDP US Japan China Hong Kong S. Korea Singapore India Australia Malaysia Vietnam Thailand 0 10 20 30 40 50 60 70 80 2008F 2007 Source: Cushman & Wakefield November 2008 January 30,28, 2008 For Private Circulation Only - - SebiRegistration No :: INB 010996539 For Private Circulation Only Sebi Registration No 7 Angel Broking Service Truly Personalized TM Industry Overview Retail PFCE breakup - Indicates Lifestyle changes Increasing focus on Lifestyle categories; FGB share to come down to 34% by CY2015 from 63% in CY2007 An analysis of the PFCE breakup indicates that with the rise in per capita income, spending on Food, Grocery & Beverages (FGB), the dominant category has declined from 68% in CY2003-04 to 63% in CY2006-07. On the other hand, share of consumers' wallet has gone up for items like Furniture, Personal Goods, Jewellery & Watches, Sports & Entertainment, etc. Going forward, according to McKinsey Global Institute, the share of FGB in annual average household consumption of Indian consumers will come down to 34% in CY2015 and further down to 25% in CY2025. This indicates that with incremental increase in income levels, Indian consumers are spending more on Lifestyle Goods or pumping savings from Value Retailing to Lifestyle Retailing. Exhibit 5: Breakup of PFCE in India 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 2003-04 2004-05 Sports goods, entertainment equipment & books Jewellery, watches etc. Personal Care Source: ICRIER Retail Report 2008, Angel Research 2005-06 2006 -07 Clothing & footwear Non-institutional healthcare Furniture, furnishing, appliances & services We believe that various factors like healthy GDP growth, growth in per capita income and PFCE and changing lifestyles of the consumers would induce higher levels of consumption by the Indian consumers. We believe that growth of the Indian Retail sector will primarily come from Organised Retail in India, where all investments in Indian Retail are expected to get parked in the future. November 28, 2008 January 30, 2008 For Private Circulation Only - - SebiRegistration No :: INB 010996539 For Private Circulation Only Sebi Registration No INB 8 Angel Broking Service Truly Personalized TM Industry Overview Retail Organised Retail in India Exciting Investment Destination India has maximum Retail potential amongst 30 Emerging World Economies An A T Kearney study on Global Retail Development Index (GRDI) has rated India as the most attractive Investment destination in Retail for three consecutive years 2005, 2006 and 2007. According to GRDI 2008, India has maximum Retail potential amongst the Top-5 attractive Retail destinations, even though it occupied second position in the survey this year. India has topped the study that ranks 30 Emerging countries on parameters like Country risk, Market potential, Market attractiveness, etc. Exhibit 6: India's Retail Potential Source: ICRIER Retail Report 2008, Angel Research Organised Retail - At a Nascent Stage Low 5% share of Organised Retail in Total Retail spells huge opportunity for India The Indian Organised Retail Industry is estimated to be around US $25.4bn at the end of CY2008. However, the segment is still at a nascent stage with almost 5% share in the Total Retail Market, which is the lowest compared to its peers in BRIC countries - Brazil (36%), Russia (33%) and China (20%). Globally, Organised Retail accounts for around 52% of Total Retail sales whereas in developed countries like USA, UK, Germany and France organised Retail accounts for 80% or more of Total Retail Sales. Exhibit 7: India's Organised Retail v/s Other countries (as a %age of Total Retail Sales for the year CY2008) 85 80 80 80 66 55 40 40 36 35 33 30 30 30 22 20 20 15 5 1 Malaysia USA Czech Rep. Indonesia India Thailand Philippines Germany Argentina Hungary Source: ICRIER Retail Report 2008, Angel Research S. Korea Pakistan 9 UK Brazil Russia France Vietnam November 2008 January 30,28, 2008 For Private Circulation Only - - SebiRegistration No :: INB 010996539 For Private Circulation Only Sebi Registration No Poland Japan China Angel Broking Service Truly Personalized TM Industry Overview Retail In perspective, the world's Top-5 global Organised Retailers, viz. Wal-Mart, Carrefour, Home Depot, Metro and Tesco combined had a turnover of approximately US $760bn in 2007, higher than the total market size of Indian Retail Industry and around 30x the size of Indian Organised Retail sector. This is in spite of India having population greater than the combined population of US, France and Germany, which is indicative of the huge Organised Retail opportunity that awaits India. High Growth Story - Good times ahead! Indian Organised Retail to grow at CAGR of 35% and capture 7.2% share in Total Retail by CY2010E According to CRISIL, the India's Organised Retail Industry is expected to grow at a substantial growth rate of around 50% to touch US $25.4bn by the end of CY2008 from US $16.9bn in CY2007. We estimate India's Organised Retail market to grow at a CAGR of 35% over CY2008-10E to touch US $46bn by CY2010. With this, the Indian Organised Retail sector is estimated to constitute 7.2% of Total Indian Retail Market by the end of CY2010, up from about 5% at the end of CY2008. Future growth of the Indian Organised Retail sector is expected to be fuelled by robust economy, changing customer preferences and needs, increase in credit card usage, favourable consumer demographics, bulging middle class, relaxation in FDI norms, increase in supply chain efficiencies and huge investments to the tune of US $25bn in Organised Retail. Exhibit 8: Growth of Indian Organised Retail Industry ($bn) 50 45 40 35 30 25 20 15 10 5 0 Indian Organized Retail Market Size % of Organized Retail to Total Retail in India 46 % 20 18 16 14 12 10 8 6 4 2 0 34 25 17 7.2% 6.0% 3.9% 5.0% CY2007 CY2008 CY2009 CY2010 Source: GRDI 2008, Angel Research; Note: For analysis purpose, we have assumed CAGR of 35% in organized retail till CY2010E Category Analysis - Bon Appetite? Not quite… Consumers get more choices in categories with advent of Organized Retailing During the regime of Traditional Retail, Indian consumers focused more on purchasing essential commodities and less on Lifestyle products. But with the onset of Modern Retail, Indian consumers now have more choice in terms of products and categories to shop from. Increasing per capita income has also resulted in a gradual shift in focus of Indian consumers towards Lifestyle categories. This trend is reflected in the increasing share of categories like Personal Care, Healthcare, Jewellery and Watches, Sports and Entertainment goods in the overall pie of Modern Retail. Food Retail though is the largest category in the overall Retail pie. November 28, 2008 January 30, 2008 For Private Circulation Only - - SebiRegistration No :: INB 010996539 For Private Circulation Only Sebi Registration No INB 10 Angel Broking Service Truly Personalized TM Industry Overview Retail Nonetheless, share of Organised Retail in the overall F&G pie is miniscule. The same is however, expected to gain momentum with the entry of organised players in the segment. Exhibit 9: Organised Sector - Category-wise Percentage Break-up 3.3 11.6 12.1 4 3.6 14.4 4.1 16 21.6 19 4 1.7 3.8 3.5 11.4 2004-05 20.4 18.5 3.3 1.5 5 2.8 13 5.1 1.9 3.6 4.7 11.3 2005-06 5.6 2.1 3.1 5.4 10.2 2006-07 2003-04 Food & Grocery Personal Care Non-institutional healthcare Clothing & footwear Total Retail Furniture, furnishing, appliances & services Beverages Jewellery, watches etc. Sports goods, entertainment equipment & books Source: ICRIER Retail Report 2008, Angel Research F&G, the fastest growing segment in Organised Retail, to capture 1.5% of Total Retail by CY2010E from 1% in CY2008E Food & Grocery: The F&G segment contributes around 75% of the Total Retail segment in India, but share of Organised F&G in the overall F&G market is just 1% compared to around 10% in China and Vietnam, around 30% in Indonesia and more than 50% in Russia. Thus, Organised Food Retailing in India has immense potential and is expected to grow at a CAGR of around 60% over the next five years and account for 1.5% of the Total Retail sector by CY2010E. Major players in this segment are Reliance Fresh, Spencer's, RPG's Foodworld, Pantaloon's Food Bazaar and Subhiksha. Exhibit 10: Penetration of Modern Format in Food Retailing Source: Pacific Economic Co-operation Council, IMF, Morgan Stanley, Angel Research Clothing & Textile has the highest marketshare in Organised Retail at 40% Clothing & Textile: The segment has the highest marketshare in the Organised Retail Sector at 40%. The segment recorded yoy growth of 30% during FY2004-06 and is expected to post CAGR of 60-70% over FY2008-10E. Key players in the segment are Pantaloon, Shoppers' Stop and Vishal Retail. November 2008 January 30,28, 2008 For Private Circulation Only - - SebiRegistration No :: INB 010996539 For Private Circulation Only Sebi Registration No 11 Angel Broking Service Truly Personalized TM Industry Overview Retail Consumer Durables: Consumer Durables is the second best performers in the Organised Retail category with 13% marketshare in Organised Retail and 10% penetration. Consumer Electronic stores have grown at a CAGR of around 50% over FY2005-08 and are expected to maintain their high pace of growth in the future as well. High Growth Niche segment to grow at a CAGR of 40% over next 3-4 years Jewellery and Watches: The segment accounts for 7% of Organised Retail in India and has penetration of 6%. Major players like Tanishq have grown at a CAGR of 40% in the past three years to reach 104 stores in 64 cities, and we estimate Titan to have 147 Tanishq stores and 22 Gold Plus stores by FY2009E. Titan is estimated to have 318 World of Titan stores by FY2009E. According to industry estimates, the segment is expected to grow at a CAGR of 40% over the next 3-4 years. Major players in Jewellery Retail are Tanishq, D'Damas and Kiah. Watch segment is led by Titan, followed by Timex and international players like Rado, Omega, etc. Home Decor and Office Furniture: The segment has 7% marketshare in Organised Retail and posted CAGR of 21% during FY2004-07. Due to a steady increase in office space and improving standards of living the segment has substantial potential to grow. All major Retailers like Future Group's Home Town, Godrej's Interio and Godrej Life space, etc. have either entered or plan to enter this segment. We expect the segment to post robust growth with the advent of Do-It-Yourself (DIY) furniture retailing through franchisee model. Beauty, Fitness and Personal Care: In 2007, overall market for Beauty, Fitness and Personal Care was pegged at US $825mn, of which the Organised Sector accounted for 10.6%. The Beauty Care segment has the lowest marketshare in the Organised Sector at 2.1%. This segment is very fragmented with Bridal make-up and Beauty care limited to small corner beauty parlours. There exists tremendous scope in providing mass customised beauty services with Organised Chains of Beauty and Personal care parlours. Early entrants are VLCC, Kaya Skin Care, Lakme Beauty Salons, Pantaloon's joint venture (JV) with Talwalkars and Body Shop. High Growth Niche Segment of Medical Retailing to grow at fast pace Medical Retailing: The Medical Retailing market was pegged at US $9.6bn in FY2007 with the Organised Retail market accounting for 2.1% of the pie, up from 1.5% in FY2004. This segment is one of the least organised of all the Retail segments but growing at a brisk of CAGR of 30% over the past three years. This is in comparison to the US and UK, where organised medical retail contributes around 54% and 48% respectively, of the total Pharmacy Sales. Thus, there is lot of scope for organised players in India to benefit from this segment. Major player in this segment are Apollo Clinic (from 60 stores in FY2007 to 200 by FY2010), Guardian Lifecare (from 120 stores in FY2007 to 400 by FY2010), Medicine Shoppe (from 100 stores in FY2007 to 700 by FY2010), 98.4° (from 40 stores in FY2007 to 300 by FY2010), etc. Where Indians Buy? - Hypermarkets to drive growth Hypermarkets to grow at hyper pace and drive growth of Organised Retail in India Retailers use various formats to deliver their value proposition to target consumers. Retailers opt for one or more formats from a plethora of formats based on location, merchandise, cost of operations and more importantly, localised consumer preference for a particular format. Retailers try to differentiate from competitors to create customer value and loyalty through their successful formats. Shoppers' Stop is a prime example in creation of having a loyal customer base with a chain of Departmental stores as customers get special treatment and better November 28, 2008 January 30, 2008 For Private Circulation Only - - SebiRegistration No :: INB 010996539 For Private Circulation Only Sebi Registration No INB 12 Angel Broking Service Truly Personalized TM Industry Overview Retail Different consumers prefer different formats services at Departmental stores compared to other formats. Further, since Indian consumers are not unique and their preferences, habits, language, cuisine, etc. change every few hundred kilometers, it is imperative for Retailers in India to change their assortment and format to suit the local taste and consumption. Hence, we have Retail formats that sell multiple products under one roof or multiple outlets selling same niche products. The Retail space per outlet varies from as small as 20-30 sq.ft. to more than 1,50,000 sq.ft. As such, it is difficult to tell the story of Organised Retail by just defining it in categories. We have listed major Retail formats operational in India and players operating them. To achieve optimum business efficiency, major Retail players usually operate multiple formats to cater to consumers according to location, size and assortment. Exhibit 11: Format analysis in Organised Indian Retail Type Departmental Stores Assortment Extensive width and depth of assortment; average to good quality Extensive width and depth of assortment; average to good quality Very narrow width of assortments; extensive depth of assortments; average to good quality Average Services Good to Excellent Pricing Average to High Prices Major Players Shoppers' Stop, Pantaloon, Westside, Ebony Spencer’s, Brand Factory, Subhiksha, Reliance Fresh, etc. Planet M, Music World, Crosswords, Sony World, Nokia Big Bazaar, Star Bazaar, HyperCity, Metro Cash & Carry Nike, Reebok, Adidas Discount Store Slightly below Average-to-Average Low Prices Specialty Store Average to Excellent High Prices Hypermarket Low Everyday Low Prices Factory Outlet Moderate width but poor depth of assortment; some irregular merchandise; low continuity Very low Lower than Departmental Stores Moderate width and depth of Average Average to High Nanz, Shoprite merchandise Source: Sinha Piyush Kumar and Uniyal Dwarika, Retail Management - An Asian Perspective, 2005, Angel Research Super Market Organised Retail is expected to derive its growth in future from Hypermarkets while Industrial Sales is expected to come majorly from Cash & Carry formats. This was reflected in the fastest growing segments in Indian Retail in FY2007 with wholesale Cash and Carry stores clocking 150% growth followed by Supermarkets (100%, albeit on a smaller base) and Hypermarkets (75-80%). Hypermarkets to grow bigger in terms of size and categories Hypermarkets offer all categories at one place with a spectrum of product assortments. However, the current Hypermarket format in India is small compared to Hypermarkets (in the true sense) like Wal-Mart and Carrefour. We believe that players that can offer a wider range and more importantly provide depth in assortment would be successful in the future. We believe Hypermarkets would move from the current format to a bigger format and comprise category killers grouped under one roof to drive future growth of the Indian Organised Retail. November 2008 January 30,28, 2008 For Private Circulation Only - - SebiRegistration No :: INB 010996539 For Private Circulation Only Sebi Registration No 13 Angel Broking Service Truly Personalized TM Industry Overview Retail Drivers of Growth Organised Retail in India at the current juncture is at a nascent stage but is growing at a scorching pace. We have enumerated and categorised certain key drivers that will sustain growth of Organised Retail in modern India, viz. Consumer or Demand-side drivers and Retailer or Supply-side drivers. Consumer or Demand-Side Drivers Increasing Disposable Income of Indian Middle class Retail Growth to be aided increasing Strivers consumption propensity of Seekers & The Indian Middle class comprising Seekers and Strivers, is the consuming class and prime target segment for Retailers in India. These two categories together constituted around 6.4% of Total Households in India in 2005 but accounted for 20% of the disposable income. The Indian Middle class is gaining weightage, both in terms of volume as well as value. The middle class is estimated to constitute around 25% of Total Households by 2015 and 46% by 2025, controlling 44% and 58% of the total disposable income in the country by 2015 and 2025, respectively. This growth in the Indian Middle class coupled with growth in their disposable income levels will drive future growth of Organised Retail in India. Exhibit 12: Growing Middle Class Source: McKinsey Demographics play for India - The Youngest population Youth and the Restless aspire to move up the income pyramid and spend more in turn driving Retail growth India is one of the youngest and largest consumer markets in the world with a median age of around 25 years, lowest compared to other countries. According to Industry estimates, India's median age would be 26 by 2010 and 30 by 2020. This young population is more dynamic compared to previous generations and aspires to move up to the next level of the income pyramid. We believe that not only are income levels rising for the youth in India but, higher number of younger people are entering the Indian workforce who are prepared to spend more money than earlier generations. Thus, it is expected that the trend of higher spending will continue with the increase in income levels of the youth and dynamic India as they demand higher standards of living in turn driving growth of Organised Retailers. November 28, 2008 January 30, 2008 For Private Circulation Only - - SebiRegistration No :: INB 010996539 For Private Circulation Only Sebi Registration No INB 14 Angel Broking Service Truly Personalized TM Industry Overview Retail Exhibit 13: Comparative Median Age India Brazil China Russia USA UK 0 10 20 30 25 29 34 38 37 40 40 50 Age (in years) Source: CIA World Factbook, Angel Research Increase in working population India’s working population to be 68% in FY2020 from 63% in FY2008; Huge opportunities for Retailers to serve the next Billion of India India is one of the largest Consumer markets in the world mainly on account of favourable demographics. At the end of FY2008, India's working population in the 15-64 years age group constituted around 63% of the population compared to its BRIC peers - Brazil (67%), Russia (71%) and China (72%) and developed countries like UK (67%) and USA (67%). By 2020, India's working population in the 15-64 year age bracket is estimated to be around 68% of the population. Thus, the market and opportunities for Retailers to serve the next billion are substantial. This shows tremendous growth potential for the consumption age group to grow and drive growth of Organised Retail in tandem. Exhibit 14: Population of India by Age and Sex: 1997 and 2020 Source: US Bureau of Census Reduced Dependency to drive Organised Retail Indians to become most independent and self-reliant over next 15 years; To earn and spend at will An average Indian consumer supports a large family of more than five members, which is also reflected in the ratio of working population and dependents of India, which is below the world average. It is estimated that the ratio of working age population to dependents over the next 15 years for India would be one of the highest in the world. November 2008 January 30,28, 2008 For Private Circulation Only - - SebiRegistration No :: INB 010996539 For Private Circulation Only Sebi Registration No 15 Angel Broking Service Truly Personalized TM Industry Overview Retail This leads us to a two-point conclusion: a) Indians in future will become more independent and educated enough to start earning early in their lives and work well beyond the retirement age, thus decreasing the number of dependents and increasing the working population. b) More members in an Indian family are expected to be working, which would lead to increase in Average household income of India. Thus, reduced dependency would eventually increase household incomes, which bodes well for growth of the Indian Organised Retail Industry. Exhibit 15: Ratio of working age population to dependents Source: United Nations, Credit Suisse Increase in Credit Cards Plastic money to contribute 1.4% of total Retail Sales in CY2010E as against around 1.2% in CY2008E According to Euromonitor, India is the second fastest growing Financial Cards market in the Asia-Pacific region. India's Credit Card base is estimated to grow at an annual rate of 30-35% from 27mn cards in 2007. It is expected that Credit Card growth would remain on high growth trajectory and fuel growth in Modern Retail on Credit. The Indian Retail Market is estimated to be US $511bn at the end of CY2008 out of which Credit Cards Sales are expected to contribute around 1.2%, which is expected to be around 1.4% of the total Retail Sales in India at the end of CY2010. Indian consumers are increasingly using Credit Cards for purchasing and shopping, dining, jewellery and durable goods due to attractive and consumer friendly schemes by various banks. A natural progression for Retailers like Pantaloon and Shoppers' Stop has been the Loyalty cards that and either standalone or in collaboration with banks and offer discounts and free purchases to the cardholders. We believe that these Loyalty cards hold the key to future growth of Modern Retail in India. November 28, 2008 January 30, 2008 For Private Circulation Only - - SebiRegistration No :: INB 010996539 For Private Circulation Only Sebi Registration No INB 16 Angel Broking Service Truly Personalized TM Industry Overview Retail Exhibit 16: Break-up of Credit Card Spending Source: ICRIER Retail Report 2008, Angel Research Internet Driving Awareness and Online Purchases On-line purchases to be driven seekers awareness by convenience and internet There has been a substantial increase in the number of Indians using the Internet. Indians have started using the Internet not only for increasing awareness but also to shop online. This, along with the increase in Credit Cards and options like cash-on-delivery have opened new avenues for Indian consumers. Indian Retailers are missing out on the opportunity that Amazon.com and EBay are providing to the US consumer. Recently, Future Group, the owner of Pantaloon, launched futurebazaar.com to capture the ever-growing Internet savvy Indians. Such web portals not only provide the convenience of home shopping but also provides the advantage of savings on costs managed by Organised Retailers. Exhibit 17: Growth of Internet Users over 2000-2005 1200% 1000% 800% 600% 400% 200% 0% Brazil China India UK USA Source: Internet World Stats, Angel Research 991% 543% 393% 103% 60% November 2008 January 30,28, 2008 For Private Circulation Only - - SebiRegistration No :: INB 010996539 For Private Circulation Only Sebi Registration No 17 Angel Broking Service Truly Personalized TM Industry Overview Retail Changing Consumer preferences and Shopping habits The prime reason for a paradigm shift in the shopping attitude of the Indian consumer is the change in their preferences and tastes with respect to brands and formats. Indian consumers have become more aware of brands and shops for Lifestyle and Value brands according to the need and occasion. Modern Retailers, on their part, are trying to get maximum share of of the consumers’ wallet by offering broader product range and more depth in the various categories. Also, according to Industry sources, 65-75% of the purchases are impulse purchases made at the point of sale. These sales are induced by brand awareness and shopping experience of the consumer. It has been empirically proven that consumers like to go back to the place where they get better shopping experience. So consumers drive growth of Organised Retail by increasing the market and compelling Retailers to give more choice in terms of brands and variety in assortments. Retailer or Supply-Side Drivers Increased Investments in Retail US $25bn Investments to translate 175mn sq. ft. of Organised Retail by FY2011E E&Y estimates investments in Organised Retail to touch US $25bn in 2010, up from US $3bn in 2006. Funds would essentially flow into the sector through Private Equity, IPO route and infusion of funds through warrants. This will allow Organised players in Retail to expand at a very high rate and play on economies of scale in the Supply Chain and procurement. We believe that due to the current economic environment and delays on part of Real Estate developers of around 18-24 months in terms of execution, around half of US $25bn of investments would materialise by FY2011E. At an average investment of Rs3,000 per sq. ft. by Retailers, these investments would translate to 175mn sq. ft. of Organised Retail space by FY2011. All key Retailers in India have chalked out substantial investments over next 3-4 years to fuel their expansion plans. Pantaloon is expected to invest around Rs6,000cr over the next four years to fuel its three-fold expansion plan and take its total Retail space to 26mn sq. ft. by FY2012. Vishal Retail is expected to invest Rs3,000cr to fuel its ambitious five-fold expansion plan to take its total Retail space to 10mn sq. ft. by FY2011. Exhibit 18: Investment plans of various Retailers Pantaloon Retail Reliance Retail Aditya Birla Retail Shoppers' Stop Vishal Retail Subhiksha Indiabulls Retail Tata Trent RPG Spencer’s Bharti- Walmart Others Total Investment (US $bn) 1.4 6.0 3.0 0.5 0.7 0.3 0.2 0.5 0.2 0.7 11.5 25.0 Source: Angel Research (1 US $ = Rs42); Note: Announced investments by players to be achieved over 3-4 years November 28, 2008 January 30, 2008 For Private Circulation Only - - SebiRegistration No :: INB 010996539 For Private Circulation Only Sebi Registration No INB 18 Angel Broking Service Truly Personalized TM Industry Overview Retail Tier- II & III cities to fuel future growth of Modern Retail Tier-II & III cities to be next growth drivers According to industry sources, Mall space in India has grown from a meagre 1mn sq.ft. in 2002 to about 57.3mn sq.ft. by end of 2008, with around 73% of the Mall space expected to be occupied by Tier-I cities and rest divided equally between Tier-II & III cities. Exhibit 19: Break-up of Mall Space in CY2008 (Mn sq. ft) 45 40 35 30 25 20 15 10 5 0 Tier I Source: Cushman & Wakefield, Angel Research % 80 73.3% 42 70 60 50 40 30 13.4% 13.3% 7.6 Tier II 7.7 Tier III 20 10 0 Tier-II and III cities in India with 18% of population contribute 22% to Total Retail Sales The initial Retail revolution in India began in the big Tier-I cities. However, now the Retail hubs in India are now finding their way to the smaller Tier-II and III cities as well, which have hitherto been left out of it. The changing landscape of Indian Retail and increasing competition has also forced Retailers to tap growth opportunity in Tier-II and III cities in India. The Top-784 cities in India constitute about 26% of population and contribute 35% to Total Retail Sales. Tier-II and III cities account for 18% of the overall population and contribute 22% to the Total Retail sales. Exhibit 20: Top-784 cities generate 35% of Total Retail Sales in India Cities Top 4 Top 9 Top 62 Top 141 Top 338 Top 530 Top 784 Source: Images Retail, Angel Research % of Population 6 8 15 18 22 24 26 Share in Retail Sales in % 9 13 22 27 31 33 35 Thus, there are substantial opportunities to be tapped in Tier-II and III cities of India for expansion of the Retail footprint. While there exists potential in the Tier-II and III cities, they are at different stages with respect to development of Organised Retail. November 2008 January 30,28, 2008 For Private Circulation Only - - SebiRegistration No :: INB 010996539 For Private Circulation Only Sebi Registration No 19 Angel Broking Service Truly Personalized TM Industry Overview Retail Growth Markets: Organised Retail in places like Lucknow, Ludhiana, Jaipur, Chandigarh and Kochi are at growth phase as the people in these cities are well-off and have the money to spend but do not have enough Organised Retail outlets. We believe this is where the next big opportunity for Retailers lies. Emerging Markets: Amidst the Retail activity, due to development, the distant and emerging towns like Agra, Amritsar, Indore, Nashik, Mysore, etc. are understanding the meaning of Organized Retail and discovering the shopping experience at Malls. We estimate Organised Retail to strengthen its base here over the next 4-5 years to reap profits. Nascent Markets: At the end of the Retail spectrum lie towns like Varanasi, Srinagar, Bhopal, Rajkot and Guwahati where consumers are getting aware about the concept of Organised Retail and its benefits to them. However, these places are still at a nascent stage of the Retail activity and are expected to grow over the next 8-10 years. Exhibit 21: Indian Cities - Retail Activity v/s Potential Source: Jones Lang LaSalle Meghraj Research Among the players, key Retailers Pantaloon and Vishal Retail are in a better position than others in the space as they have a pan-India footprint and are present in Tier- II and III cities, which they can consolidate and build upon. Currently, Pantaloon and Vishal derive 35% and 80% of their revenues from Tier-II and III cities respectively, and we expect these players to continue and maintain their expansion there. Repealing the Urban Land Ceiling Act - to free more land for expansion The Urban Land Ceiling and Regulation Act (ULCRA) was passed in 1976 to ensure social equality. The Act prevented hoarding of urban land available in the market. Urban cities were categorised into A, B, and C for segregation of land purposes. Also, a ceiling was put on the maximum usage of land by the corresponding owner, which was fixed at 500 sq. mts. as per the provisions in the Act. ULCRA was repealed in November 2007 and it is estimated that over 15,000 acres of Real Estate space would be released in Mumbai for development going ahead. November 28, 2008 January 30, 2008 For Private Circulation Only - - SebiRegistration No :: INB 010996539 For Private Circulation Only Sebi Registration No INB 20 Angel Broking Service Truly Personalized TM Industry Overview Retail This would lead to high growth expansion and mall development in the city and consequently, more space for Modern Retail to thrive . Shortened Supply Chain benefits consumers Shortened Supply Chain to benefit farmers To and drive consumers; stores A Traditional supply chain in India comprises 5-6 levels from Wholesaler to Sub-Wholesaler to the Distributor to the Local Mom and Pop stores to the Consumers. Two major disadvantages of this Supply Chain are as follows: a) Cost of the product increases at every stage of the Supply Chain resulting in increase in the price of the products due to cascading effect, and b) Increase in shrinkage at every stage of the Supply Chain results in loss of goods for consumption. One of the biggest advantages of a Modern Retail Supply Chain has been elimination of the middlemen thereby reducing the intermediaries to 2-3. This shortening of Supply Chain favours the farmers (in case of agricultural goods) or manufacturers as they get better price for their products and consumers benefit from the low prices that retailers can afford to offer due to the savings arising out of shortening of the Supply Chain. Both the Traditional and Modern Supply Chain work in tandem in the current Retail environment in India. footfalls to Organised Retail Exhibit 22: Traditional v/s Modern Supply Chain Source: Angel Research Key Retailers to invest in Supply Chain sofwares to cut costs and track inventories Retailers have realised that they can prune costs and improve their Margins if they are able to shorten the Supply Chain. For instance, Pantaloon orders directly from the manufacturers and receives the supplies right out of manufacturers' godowns. Hence, both Pantaloon and Shoppers' Stop have invested heavily on inventory management systems to keep track of inventory and to place orders with the manufacturers in time for next round of sales. The key point here is that though there are cost benefits in the modern Supply Chain, these benefits are derived from shortening the Supply Chain and not increasing efficiencies in the Supply Chain in India. November 2008 January 30,28, 2008 For Private Circulation Only - - SebiRegistration No :: INB 010996539 For Private Circulation Only Sebi Registration No 21 Angel Broking Service Truly Personalized TM Industry Overview Retail Challenges & Risks There are certain challenges and risks facing Indian Retail that are hampering this growth. While the Retail game is far from over, there exist few challenges, which need to be tackled to attain higher economies of scale and growth. Acceptance of Organised Retail Opposition of Traditional Retail impedes growth of Modern Retail in India Growth of Organised Retail in India largely depends on acceptance of the Modern Retail format in India. There exists the challenge of Traditional Retailers accepting co-existence of Modern Retail in the ecosystem going ahead. It may be noted such opposition had also taken political overtones in recent times. A case in point was the hurdles faced by retailers like Reliance and Spencers' in opening their stores in UP and West Bengal, respectively. Another recent instance of Modern Retail getting impacted by political influence was Metro AG. not being able to open its Cash and Carry store in West Bengal due to cancellation of its APMC licence. At the end of it, the West Bengal government did allow the Metro AG shop. Nonetheless, the chain of events has forced Retailers to re-think their strategies to be in sync with the political bigwigs and trade unions before opening a store. Thus, even though Modern Retail has tremendous growth potential in India, the key players face a challenge from the local trade unions and political parties in the garb of upholding the rights of the Traditional Retailers. Supply Chain inefficiencies Supply Chains are Short but not smooth as they are marred by inefficiencies that hit the Bottom-lines of retailers Although it is a widely held belief that Modern Retail has the advantages of an efficient supply chain, it appears to be efficient only when compared to the unorganised sector. When compared with International Retailers like Wal-Mart and Carrefour, it is quite apparent that the Indian Retailers have a long way to go before they achieve super efficiencies in their supply chain. First challenge is that of Inventory Management at the local store level as well as aggregate warehouse level. Extra inventory means increase in inventory carrying costs and lower profits. Modern players like Pantaloon have IT systems in place for Inventory Management and Accounting. IT systems like SAP help Retailers plan their inventory at the aggregate level and reduce wastage. SCM-IT has helped Retailers plan their stock outs, timely replenishment of stock, stock movement from warehouse to a store, adequate stock requirement at a store to match consumer preferences, etc. This ensures customer satisfaction and induces repeat purchases, which in turn lends a fillip to Top-line, lowers costs and boosts Bottom-line. The biggest challenge for a Retailer is efficient and smooth implementation of the Supply Chain software across stores and integrating them with the central warehouse as it is time consuming and trained personnel are required to use the software. Second challenge in Supply Chain is logistics. F&G constitutes around 59% of the shopping list of an average Indian consumer. Therefore, it is imperative for any big Modern Retailer to set up a cold storage chain. For instance, Amul is considered the best example of having a developed cold storage chain in India. Until and unless Modern Retailers like Reliance and Food November 28, 2008 January 30, 2008 For Private Circulation Only - - SebiRegistration No :: INB 010996539 For Private Circulation Only Sebi Registration No INB 22 Angel Broking Service Truly Personalized TM Industry Overview Retail Bazaar do not fully develop integrated cold storage Supply Chains, they would continue to lose because of wastage while moving huge quantities of perishable items. The challenge here is not only of establishing a cold chain, but inducing purchase of frozen food items also as Indian consumers do not buy frozen foods as they prefer to buy fresh stuff. Thus, if consumers do not buy frozen foods, then the cold chain is not utilised to its full capacity and proves to be cost inefficient. Third hurdle in Supply Chain is procurement. The big Modern Retailers enjoy economies of scale till they expand and actually become "big" on International scale. According to industry sources, true economical benefits of scale in procurement are achieved when procurement is made in thousands or millions of units.The main challenge here is to procure adequate amount of stock as per customer requirements, or sitting on inventory would result in increasing costs. Real Estate costs still high compared to global benchmarks Despite the Real Estate slowdown, Rentals at 10% are still higher than the global 4% benchmark According to industry experts, Real Estate costs are not in sync with sales and vary as much as 10% of sales, which is too high compared to 3-4% for the global Retailers. For instance, Pantaloon shelled out over 8.4% in Rents and Mall Management fees in 2007-08. Such high Rental costs make the business model infeasible for most retailers as the current MRP regime does not allow Retailers to charge consumers different prices for the same product according to location, ie., higher price for the up-market stores and lower prices for downtown hypermarts. Moreover, many Retailers have moved out of prime destinations in various Malls in Tier-I cities as they are not clocking Sales in proportion to the Rent that they are paying, which is sometimes as high as Rs50lakh per month. Thus, it has become imperative for Real Estate developers and Retailers to work out a revenue-sharing model, which will result in a win-win situation for both. However, the final choice lies with the strategy a Retailer chooses to adopt. Vishal Retail plays on volume growth in Tier-II and III cities whereas Shoppers’ Stop and Pantaloon rely on big-ticket purchases in Tier-I cities. Execution risks Two-year delays in store roll-outs for retailers on account of high execution risk of developers India's Retail revolution at the current juncture is dogged by delays (almost two years) in opening almost 150 malls, which were scheduled to open this year. These delays are impacting Retailers' expansion plans and has seen them re-thinking viability of their business model under the current scenario. The Real Estate developers are also unable to show execution of Malls on two counts, viz. Mall development is still a relatively new concept in India and Real Estate developers are facing lot of new Regulatory issues that were not factored in earlier, causing delays in mall rollouts. The Real Estate developers are also faced with liquidity crunch due to which new projects are not being taken up currently, causing a revision in the Mall development plans. Retailers, on other hand, are suffering due to delays in Mall rollouts as they have substantial raw material and finished goods inventory piled up but no stores to stock them. Thus, many Retailers have revised their projections for Retail space expansion in line with the Mall developers' expectations. November 2008 January 30,28, 2008 For Private Circulation Only - - SebiRegistration No :: INB 010996539 For Private Circulation Only Sebi Registration No 23 Angel Broking Service Truly Personalized TM Industry Overview Retail High Personnel costs Lack of specialist workers and management personnel has led to Supply-Demand imbalance in nascent sector On an average, the Indian Organised Retail players shell out upwards of 7% of Sales towards Personnel costs. For instance, Wal-Mart spends around 17% of its Revenues as Personnel costs. Given that ratio, Indian salary to US salary is less than 30%, this means that the world's biggest Retailer, Wal-Mart spends aroumd 5.1% of its Revenues on employees. Such high HR costs are essentially the costs incurred on training the employees as there's huge deficiency of skilled labour in India. Attrition rates in the Industry are also as high as 50%, which is high compared to other Sectors. Factors that contribute to high rate of attrition in the Indian Organised Retail are change in career path, employee benefits offered by competition, flexible and better working hours and conditions. Shrinkage India’s Retail shrinkage is the highest at 3.2%, translating into annual losses of US $2bn Retail shrinkage is the difference between book and actual stock or the unaccounted loss of Retail goods. Such losses are the main cause for theft by employees, administrative errors, shoplifting by customers or vendor fraud. Industry circles estimate nearly 3-4% loss of an Indian chain's turnover on account of shrinkage, nearly double their Western counterpart. Exhibit 23: India's Shrinkage v/s Other Countries Shrinkage as % of Sales (2006) 3.5% 3.0% 2.5% 2.0% 1.5% 1.1% 1.0% 0.5% 0.0% India Thailand Japan Singapore Australia Average Asia Pacific 1.0% 1.8% 1.7% 1.2% 1.3% 1.4% 1.4% 1.3% 1.2% 3.2% 2.9% Shrinkage as % of Sales (2007) Source: Centre for Retail Research 2008, Angel Research This translates into annual loss of around US $2.1bn for the industry. Little wonder then that the players are keen to invest on shrinkage control mechanisms such as installing RFIDs, Sensors, IT solutions and training employees. Due to such high shrinkages, organised players in India such as Big Bazaar and Pantaloon have invested in RFID, CCTV and antennas to reduce retail shrinkage. RFIDs in particular are being widely adopted by the Retail majors. On account of these measures, Shoppers' Stop was able to bring down its shrinkage from 0.66% of revenues in 2001-02 to 0.46% in 2006-07. November 28, 2008 January 30, 2008 For Private Circulation Only - - SebiRegistration No :: INB 010996539 For Private Circulation Only Sebi Registration No INB 24 Angel Broking Service Truly Personalized TM Industry Overview Retail A Tale of Two Countries - India and China India growth can benefit from Right now, India is at the same crossroads where China was during 1992-96 in terms of Retail development and economic environment. However, we believe that India will reach where China is today much earlier on the back of faster growth trajectory. China's Organised Retail Industry has evolved since 1992 and is estimated to constitute 20% of its Total Retail Industry by the end of 2008. On other hand, India's Organised Retail is expected to grow at a CAGR of 31% over the next five years and garner 11% share of Total Retail Industry by end CY2013E. Limited foreign direct investments (FDI) in the Indian Retail Sector has been the bone of contention for many global Retailers and has acquired political overtones on the premise that FDI would harm the local unorganised Retail segment and would get the better of Organised Retailers in India. Taking cue from China, a country with similar demographics and consumer behaviour, India too can grow its Retail Sector by leaps and bounds and attract investments from global Retailers. However, for this to happen, India needs to circumvent the challenges that Industry experts refer to as the Four P's of Retail - 'Politics' which is hampering growth of the Retail segment due to inept policies, cost of retention and hiring good and talented 'People', development issues of 'Property' and supply of 'Products'. Chinese Retail story for faster Key Takeaways from China FDI Roadmap for Indian Retail is different from China FDI in Indian Retail to come format-wise as against region-wise in China While FDI in the Retail segment in China was first permitted in 1992, it was restricted to 26% of the share in JVs for foreign players and was allowed only in six major cities of China. It is apparent that China approved FDI region-wise and hence coastal China and other major cities benefitted from the Retail sector reforms. Exhibit 24: FDI Roadmap in China Year 1992 1999 2002 2003 2004 Significant events FDI in Retail permitted but restricted to 26% share in JVs and allowed only in six major cities including Beijing, Shanghai and Guangzhou and the SEZs of China. Regional capitals and major provincial cities opened up to foreign retailers. 49% FDI allowed in Retail Sector by China. JV share for Foreign retailers allowed to exceed 50% and all the capital cities of China opened up for FDI. 100% FDI allowed in Retail but China continues to keep a cap on the number of permitted outlets and their locations; also, Wal-Mart, an anti-union firm, was forced to allow unions for store workers. 2005 Most of the restrictions on location, size and number of outlets lifted but few restrictions remain on JVs running more than 30 stores November 2008 January 30,28, 2008 For Private Circulation Only - - SebiRegistration No :: INB 010996539 For Private Circulation Only Sebi Registration No 25 Angel Broking Service Truly Personalized TM Industry Overview Retail India has adopted a different roadmap for FDI in Retail. FDI, format-wise rather than region-wise, has been permitted in India. The first step by the government to partially liberalise the Retail Sector was in the form of allowing FDI up to a maximum of 51% in Single-Branded Retail segment under the approval route and up to 100% in case of Wholesale/Cash and Carry under the Automatic route. Going forward, expectations are rife that the government would permit 51% FDI in multi-brand retailing (MBO) that would allow retailers like Wal-Mart and Carrefour to enter in India without a JV. We believe that this step is still 2-3 years away and would provide the local players adequate time buffer to settle full-fledged large scale operations and gain similar status as these giant retailers. Also, the local players could receive some incentives from the government over the foreign players to encourage them to expand. FDI in Retail does not harm local Organised Retailers FDI in Retail aids the growth of Total Retail, rather than impeding the growth of the domestic sector FDI in Retail was permitted in China in 1992 and attracted around US $22bn or around 3.6% of the total Chinese FDI inflows. Since then, more than 40 global Retailers including Carrefour, Wal-Mart, Metro, Tesco and Home Depot have secured approval to operate in China. Currently, all the major International players operate in China with Carrefour being the largest among them. Carrefour has around 112 stores in China (in 2007) while Wal-Mart had around 204 stores (September 2008). However, the Top-5 Retailers in China are still the local players who scaled up their operations. This indicates that opening up the Retail Sector will not hurt the local Organised Retail players. Exhibit 25: Top-Ten Chain Retailers in China - 2007 Rank Company Sector Sales (US$ bn) 1 2 3 4 5 6 7 8 9 10 Gome Bailin Suning Vangaurd Dashang Carrefour Wu-Mart RT-Mart Chongqing Shangshe NGS Consumer Electronics Food Consumer Electronics Food Food Food Food Food Food Consumer Electronics 14.6 12.5 12.2 7.2 7.2 4.2 4.0 3.7 3.2 3.2 Sales Growth (%) 18 13 40 33 39 24 21 31 23 13 No. of Stores 1,020 6,454 632 2,539 145 112 718 85 263 3,226 Source: China Chain Store & Franchise Association; Note : Carrefour is the only non-Chinese retailer in the list Overall, FDI in Retail in China has spurred the Sector. On account of the Retail reforms, Retail Sales since 1992 have grown at a CAGR of around 15%, with Carrefour clocking high growth of more than 50% in 2007-08. November 28, 2008 January 30, 2008 For Private Circulation Only - - SebiRegistration No :: INB 010996539 For Private Circulation Only Sebi Registration No INB 26 Angel Broking Service Truly Personalized TM Industry Overview Retail Growth to be fuelled by Big-Box stores and Hypermarts We expect Hypermarts to contribute around 17% of the overall Organised Retail space in India by FY2011E Over the past 14 years, Retail growth in China has been fuelled by Hypermarts that have provided consumers the Value Retailing experience. India, like China, is a price sensitive, value preferring market. Hence, Hypermarts are expected to fuel growth of the Indian Organised Retail segment as well. Moreover, with the advent of Hypermarts started by players like Pantaloon and Vishal Retail, true potential of Big-Box stores to induce high consumption at competitive prices has come to the fore. Major Retailers have already chalked out expansion plans and we expect Hypermarts to constitute a major part of it. We expect around 250 Hypermarts to become operational and contribute around 17% of the overall Organised Retail space by FY2011E. Thus, we believe future growth of Organised Retail in India would be driven by Hypermarts. Retailing restricted to Big cities in China, unlike India India taps Tier-II and III cities for future growth in Retail It is important to remember while comparing India and China, that the path of Retail growth in India and China is different. India believes in inclusive growth by simultaneously developing smaller towns and the big cities whereas in China, Retail growth has been led by the big cities and coastal areas while the interiors are still devoid of it to a great extent. Indian Retailers like Pantaloon and Vishal Retail are present in around 63 and 101 cities respectively, across India and are national players even as share of Organised Retail in India is just 5%. On the other hand, Chinese Organised Retail has 20% share in Total Retail but Retailers like Wal-Mart and Carrefour are still present only in about 50 cities even after being in the country since the past 12 years. However, China has now realised that next phase of growth would come from Tier-II and III cities and Retailers have now started expanding in the interiors. Indian consumers similar to Chinese Unlike the US and UK, Hypermarts in China and India are located in the city as both the Indians and Chinese shop frequently for Food & Groceries compared to their Western counterparts. Also, both the Indian and Chinese consumers prefer fresh produce and dislike the concept of frozen foods. The prime reason for such similarities between Indian and Chinese consumer behaviour is that both nations have low car penetration due to which they shop frequently and have a low average transaction size. Consumer Credit growth to sustain Retail growth Indian consumers benefit from a sizable market for consumer credit. In India, non-mortgage consumer debt is roughly 5% of GDP compared to 2% in China. India has to sustain growth of consumer credit in India with Banking reforms at regular intervals to induce purchasing by the Indian consumers. However in comparison, India's private Financial sector is better developed than China as it is more geared towards consumer needs than China's Industry-oriented Banking system. Hence, we expect growth in consumer credit to be the key driver of growth for Organised Retail in India. November 2008 January 30,28, 2008 For Private Circulation Only - - SebiRegistration No :: INB 010996539 For Private Circulation Only Sebi Registration No 27 Angel Broking Service Truly Personalized TM Industry Overview Retail Conclusions and Our Expectations High growth to continue We expect Organised Retail to continue on high growth trajectory of 35% per annum till CY2010E to reach US $46bn and account for 7.2% of the Total Retail share. The Retailers in the Angel Universe would account for around 8% share of Organised Retail in India by FY2010E, which translates into a mere 0.6% marketshare of the Total Retail Industry. Even if the government defers opening up the Retail Sector to the global players till CY2010E, there still would be enough headroom and opportunity for the global Retail giants to enter and penetrate the Indian Retail Sector in CY2010. However, we expect the government to provide some buffer time to the domestic Organised Retail Sector to settle down into stable growth zone, benefit from the JVs and collaborations with the global Retailers and adapt the global expertise and technological advancement. Hypermarkets to drive growth, enough headroom for all Hypermarts to contribute mere 1% to total Retail sales in CY2011E, showcasing enough headroom for all players Major Retail players have chalked out rapid expansion plans to open hypermarkets even in the relatively smaller markets of Tier II and III cities. Future Group's Big Bazaar crossed the 100-store mark in September 2008 and targets to touch 200 stores by FY2010. Similarly, other retailers like Shoppers’ Stop and Trent are also planning to have 10 HyperCity stores and seven Star Bazaars respectively, by FY2010E. Notably, in spite of the massive expansion plans in the pipeline, we believe there's enough potential for all the players to grow. According to a ASSSOCHAM and KPMG study, by CY2011, Tier I and II cities will overall have 315 Hypermarkets. We estimate 252 Hypermarts by CY2011 post attaching 20% discount on account of execution risk. At an average size of 1,20,000 sq.ft., this translates into 30mn sq.ft. of Hypermart space by CY2011, which would be around 17% of the Total Organised Retail space by CY2011. At an average annual sale of Rs10,000 per sq.ft., we estimate contribution of Hypermarts to Total Retail Sales in India at around 1.0% by end of CY2011. On the other hand, Wal-Mart alone would contribute around 7.8% of the Total Retail Sales in USA and the Top-10 Retailers in US would constitute around 20% of the Total Retail Sales in the US. This once again proves that there's plenty of headroom available to the Hypermart players, both domestic and global, to fuel growth of the Organised Retail Sector in India. With the advent of multiple domestic players like Shoppers’ Stop in Hypermart format and imminent opening up of the Retail Sector to global players like Wal-Mart and Carrefour, we believe that domestic retailers like Pantaloon Retail, which are currently operating predominantely in the Hypermart format will not lose out on the Retail growth. F&G Retailing to grow but its share in consumer wallet to decrease While Organised F&G Retailing contributes around 19% to overall Organised Retail Sales, its share in overall F&G Retailing in India is a minuscule 1%. However, it is one of the fastest growing segments in Organised Retailing and is estimated to grow at a CAGR of 60% over the next five years. Going forward, while share of Organised F&G Retailing would increase on the back of consumer spending, its share in consumer's wallet is set to decline. This would happen as savings from the Supply Chain that are passed on to the consumers’ in the form of low November 28, 2008 January 30, 2008 For Private Circulation Only - - SebiRegistration No :: INB 010996539 For Private Circulation Only Sebi Registration No INB 28 Angel Broking Service Truly Personalized TM Industry Overview Retail prices, is expected to result in higher spending on Lifestyle products. For Organised Retailers, the key challenge in F&G Retailing is to compete with the low-cost structure and convenience of the kirana or roadside players, as most of the savings accrued from shortening of the Supply Chain is negated by cost of setting up inventory management systems and softwares, rentals and employee salaries. Thus, we believe that a new low-cost format in the F&G segment would be more successful and which would operate on more competitive cost structures. Private Labels - The next big thing A relatively new concept of Private Labels has cropped up in Organised Retail in India wherein Retailers to cash in on Private labels for better Margins and high bargaining power with manufacturers Retailers are selling products under their own brand name. These products, which are manufactured by outsourced producers are catching up at a rapid pace with the consumers. The Retailer also derives many advantages of using many Private Labels, as they would make more profits by selling Private Labels than the brands of Organised players and also use it to reduce the bargaining power of the suppliers. In the long run, they can use the Private Labels to attract customers to his outlet. The consumer also gains as they get products which are as good as the manufactured ones albeit at a lower cost. Globally, own label brands contribute to 17% of Retail Sales, and are growing at 5% per annum. International Retailers like Wal-Mart of USA and Tesco of UK have 40% and 55% own Label brands representation in their stores, respectively. In India there is an increasing trend towards acceptance of Private Label brands and thus their penetration is on the rise especially in the Apparel, Consumer Durables, Home Care and FMCG segments. For example, some of the major F&G Retailers' average between 20-30% own Label brands penetration with the highest penetration of around 50%. In Clothing and Apparel, some Retailers have as much as 65% of the sales coming from own label brands. Overall, in India, Private Labels constitute 10-12% of the Organised Retail product mix. In some other countries, the Private labels are becoming a force to reckon with. Exhibit 26: Turnover Comparison : Leading Retailer Label v/s Brand Leader 2012 (US $Mn) 3,500 3,000 2,500 2,000 1,500 1,000 500 Consumer Durable Source: Technopak Brand Leader 3,000 Retailer Label 1,500 875 450 125 FMCG & Personal Care 1,000 375 875 375 163 13 225 250 Footwear 500 Apparel & Home Accessories Furnishings Pharmacy Furniture November 2008 January 30,28, 2008 For Private Circulation Only - - SebiRegistration No :: INB 010996539 For Private Circulation Only Sebi Registration No 29 Angel Broking Service Truly Personalized TM Industry Overview Retail FDI won't harm Indian Organised Retail FDI in Retail will not harm but instead it would aid the domestic Retail Industry FDI in Retail has a negative connotation as opening up of the Retail Sector to the global players is expected to harm Indian Retail, both Traditional and Organised. The domestic Organised Retailers were earlier wary of allowing FDI in the Retail Sector in India as they argued that the domestic Retailers should be given more time to entrench themselves before the Sector is thrown open to the foreigners. But now, the domestic Retailers have realised that they stand to gain from the technical knowledge of the global Retailers to spruce up and manage their own back-end operations. Thus, we believe FDI in Retail will not harm instead it would aid the domestic Retail Industry to grow drawing from the expertise of the global players. A prime example in this case is neighbouring China. Opening up of the Retail Sector in China not only increased size of Organised Retail there but also bolstered overall Retail in the country due to introduction of new product categories at various price points and introduction of global practices in Supply Chain management. Resilient Indian Retail gears up to brace future challenges India's Organised Retail Sector is upgrading itself in terms of Technology and Services to combat future challenges. Organised Retailers like Bharati Retail are upgrading their facilities and ushering technological changes in collaboration with global giants like Wal-Mart. Recently, Trent also tied-up with Tesco to improve its Supply Chain and back-end operations. Such tie-ups are expected to bring in expertise and investments by foreign partners in back-end operations like Supply Chain and Logistics. These players are expected to set up various formats and aid cost saving by making the Supply Chain more efficient and Retailer friendly, rather than Manufacturer friendly as the case is currently. Local Retailers like Pantaloon have also set up their logistic subsidiaries to vertically integrate into Supply Chain management and reap cost benefits arising out of vertical integration. A part of the benefits is expected to get passed on to the consumers while the balance would flow to the Bottom-line of the Retailers. Retailers with First-Mover advantage to reap the benefits First Mover Retailers to have advantage in capturing maximum market share We believe that competition in the Organised Retail segment is set to intensify as it is an attractive investment bet for both the Indian and global players. We believe that Retailers with first-mover advantage are better placed to tackle competition be it in the form of other Indian or later global Retailers. They would enjoy an edge over others in terms of relatively lower Real Estate costs, established brand name, entry in Tier-II and III cities and efficient Supply Chain. The Real Estate Advantage: Though Real Estate is cooling down, the Retail Rentals are still very high. In prime locations, Retail rentals have cooled off by 10-15% after a rally of around 300%. Retailers who have tied up in advance with the Mall developers will benefit more as they would negotiate the stores at rentals of around one-fifth of the Rent on completion of the Mall. These agreements usually have a longer duration of 6-10 years. Hence, Retailers like Pantaloon, who have tied up space of 22mn sq.ft. out of the 26mn sq.ft. to be operational by FY2012, are in a better position than the new players as it would save on Rental costs. November 28, 2008 January 30, 2008 For Private Circulation Only - - SebiRegistration No :: INB 010996539 For Private Circulation Only Sebi Registration No INB 30 Angel Broking Service Truly Personalized TM Industry Overview Retail Opportunity to capture higher marketshare: We expect long-term growth in Organised Retail to come from Tier-II and III cities. Established players due to their scale, brand recognition and anchor tenant status would have easy access to Tier II and III cities compared to the new entrants. Further, established players would enjoy a major first-mover advantage in terms of expanding beyond Tier III cities as many of these cities can absorb only one or two big retailers. Hence, established Retailers in these markets would create entry barriers for the new entrants and would hence garner larger share of the pie. Large Retailers to save money by playing on Economies of Scale Play on Economies of Scale: Established big Retailers today command economies of scale and have bargaining power to command better prices from the manufacturers which new players - local or global - would lack. Also, manufacturers become fastidious in having similar Retailer oriented arrangements with all the players in the Industry. It is on account of this that the established players would stand to benefit drawing on their first-mover advantage by sealing better deals with the manufacturers. Scale of operations of the incumbents also results in cost savings in the Supply Chain due to efficient logistics and shortened Supply Chain. Thus, we believe that established players have first-mover advantage that would benefit them not only in terms of market and consumer experience but also in cost cutting and capturing maximum share of the consumers’ wallet. Talent Retention a big challenge It is a well known fact that the Retail Segment suffers from high attrition, which is sometimes as high as 80% in front-end Retailing. The Retail Sector currently requires talent to manage technological advancement, supply chain, marketing, product development, research, etc. It is estimated that the Retail Sector will be generating around 1.5mn jobs by FY2010. There exists a substantial gap between supply and demand in this Sector, which has forced the Retailers to retain talent at higher wages. This is exerting pressure on the Margins of the Retailers. We expect this trend to continue going ahead also with HR costs expected to be as high as 5-7% of Sales. November 2008 January 30,28, 2008 For Private Circulation Only - - SebiRegistration No :: INB 010996539 For Private Circulation Only Sebi Registration No 31 Angel Broking Service Truly Personalized TM Industry Overview Retail Outlook and Valuation Organised Retail - Growth is inevitable The Retail Sector in India is currently highly fragmented with around 12mn Retail outlets and around 5% share of Organised Retail. India's Retail Sector was pegged at US $511bn at end of CY2008 and is estimated to grow at a CAGR of 12% over CY2008-10E to US $640bn by CY2010. Organised Retail was pegged at around US $25.4bn at the end of CY2008 and we estimate it to touch around US $46bn by CY2010 growing at a CAGR of 35% and garnering 7.2% share of Total Retail in India. We are positive on the Retail Sector as we believe that the long-term growth story in Organised Retail is very much intact. We believe that the key levers of growth like rise in per capita income, growing middle class, increase in working population, credit cards, increasing internet penetration and investments in the Sector are expected to remain robust in the future, which would drive growth of Indian Organised Retail Industry. We believe this growth in Organised Retail would come on account of competition and co-creation with the Real Estate developers, Retailers and Manufacturers as the key stakeholders striving towards the common goal of satisfaction and completion of consumers' needs and demands. Players set to witness robust growth Angel Universe to clock a CAGR of 32% and 34% in Net Sales and Net Profit respectively over FY2008-10E The Angel Retail Universe comprises key Retailers in India viz. Pantaloon Retail India Limited (PRIL), Vishal Retail Private Limited (VRPL) and Titan Industries. Angel's Retail Universe is estimated to clock CAGR of 32% and 34% in Net Sales and Net Profit respectively, over FY2008-10E. Leading the pack is PRIL, which is estimated to grow its Top-line and Bottom-line at a CAGR of 35% and 46% respectively, over FY2008-10E. VRPL is estimated to post CAGR of 40% and 8% in Top-line and Bottom-line respectively, over FY2008-10E. Titan Industries, the niche Jewellery and Watch Retailer, is estimated to grow at a stable CAGR of 26% both in Top-line and Bottom-line, over FY2008-10E. We believe that next phase of high growth in the Indian Retail Sector is inevitable and would be driven by Hypermart formats. Retailers in India have magnanimous expansion plans with PRIL expecting to touch 30mn sq.ft. by FY2013E from FY2008 levels of 9.4mn sq.ft. (on a consolidated basis) and VRPL targeting five-fold growth to touch 10mn sq.ft. by FY2011E. Although delays of around three quarters in terms of store rollouts is expected due to delay at the developers' end, in the bigger scheme of things, we expect that Retail Sector to maintain its growth momentum over the longer term. Margin contraction worries overdone It is believed that intensifying competition from the domestic and global Retailers going ahead would result in Margin pressures for the Organised Retail players. However, we believe that such worries are overdone and both Operating Margins and Net Margins will sustain on account of increasing efficiencies in supply chain which would optimise costs and enable the November 28, 2008 January 30, 2008 For Private Circulation Only - - SebiRegistration No :: INB 010996539 For Private Circulation Only Sebi Registration No INB 32 Angel Broking Service Truly Personalized TM Industry Overview Retail players to expand their Margins. We estimate EBITDA Margin of Angel's Retail Universe to increase from 9.1% in FY2008 to 9.5% in FY2010E and Net Profit Margin to increase from 3.4% in FY2008 to 3.5%. Witnessed significant de-rating Retail stocks have de-rated on the bourses on account of various concerns On the bourses, the Angel Retail Universe has been de-rated over the past two years and has underperformed the Sensex, with Titan being the only exception. Titan outperformed the Sensex due to its robust Return Ratios and stable growth. We believe the Retail stocks were de-rated on the bourses on account of concerns of Margin contraction on the back of high Rental costs, escalating HR expenses and inefficient Supply Chains. Moreover, the liquidity crunch consequent to the global financial meltdown only aggravated the woes of the Retailers. This has raised concerns about continuation of the high growth Retail story in India amidst the current macro-economic environment wherein store rollouts are being postponed due to delays in Mall development. Exhibit 27: Retail Companies v/s Sensex PRIL VRPL TITAN SENSEX Nov. 2006 Nov. 2008 Source: Google Finance, Angel Research Exhibit 28: Comparative Valuation Price (Rs) Company FY08 EPS (Rs) FY09E FY10E CAGR (%) (FY08 -FY10E) Pantaloon Vishal Retail Titan Industries Sensex Source: Angel Research P/ E (x) FY08 FY09E FY10E P/BV (x) RoE (%) FY08 FY08 210 68 932 9,093 7.9 18.2 33.2 853 9.9 15.4 41.0 961 14.7 21.0 52.7 1130 36.4 8.0 26.0 18.8 26.6 3.7 28.1 10.7 21.2 4.4 22.8 9.5 14.3 3.2 17.7 8.1 2.7 0.6 9.3 1.9 8.6 20.4 37.7 17.6 November 2008 January 30,28, 2008 For Private Circulation Only - - SebiRegistration No :: INB 010996539 For Private Circulation Only Sebi Registration No 33 Angel Broking Service Truly Personalized TM Industry Overview Retail A case for better risk-reward opportunity High investment potential in Retail translates into a risk-rewards ratio in favour of investors Though some of the concerns were justified, we are positive on the Retail Sector. We believe the Retail Sector provides an opportunity for investors to benefit from the high, but stable growth expected in the Sector till FY2010 and beyond. Further, the Retail stocks have been battered on the bourses and are currently trading at attractive multiples. Thus, the recent correction in the stocks has turned the risk-reward ratio favourable for investors. The growth potential and tremendous opportunity to invest in the Angel Retail Universe can also be gauged from the fact that the Top-10 Retailers in the US contribute 3.1% of the Total Market Capitalisation of the US indices, of which Wal-Mart alone contributes 1.6%. Back home, the Top-4 Indian Retailers contribute a meagre 0.25% to the total market capitalisation of Indian bourses. Valuation Matrix We have ranked all the companies in the Angel Retail Universe on various tangible and intangible factors as mentioned in the Valuation Matrix. The rank obtained by various players in the Industry is a reflection of our forecast and valuation. The companies are ranked 1-10, with 10 being the most favourable Rating. CMP (Rs, November 28, 2008) Earnings CAGR (FY2008-10E) PE multiple (x), FY2010E EV/Sales - FY2010E Execution Capability Pace of Expansion Weightage (%) Pantaloon Titan Industries Vishal Retail 20 8 9 5 10 8 3 5 5 9 4 7 5 7 9 7 10 9 8 7 10 9 4 8 10 2 7 4 10 4 6 5 10 6 5 9 10 4 3 1 625 570 495 1 2 3 14.3 17.8 3.2 0.7 0.9 0.5 210 932 68 Buy Neutral Neutral OPM (%) Rank = RoCE (%) Rank = RoE (%) Rank = Earnings CAGR (FY2008-10E) Rank = <3 1-2 <8 1-2 <15 1-2 <25 1-2 3-7 3-4 8-12 3-4 15-25 3-4 25-40 3-4 7-10 5-6 12-16 5-6 25-35 5-6 40-50 5-6 10-12 7-8 16-20 7-8 35-50 7-8 50-60 7-8 Recommendation Cumulative Total Category Depth Category Width Format Range Management RoCE (%) OPM (%) RoE (%) Rank >12 9-10 >20 9-10 >50 9-10 >60 9-10 November 28, 2008 January 30, 2008 For Private Circulation Only - - SebiRegistration No :: INB 010996539 For Private Circulation Only Sebi Registration No INB 34 Angel Broking Service Truly Personalized TM Industry Overview Retail Angel Top Pick - Pantaloon Retail (India) Limited Our Top Pick PRIL to give 35% upside We Initiate Coverage on the Retail Sector in India with a positive outlook. We expect our Retail universe to clock strong CAGR of 32% and 34% in Net Sales and Net Profit respectively, over FY2008-10E. PRIL is our Top Pick in the sector as we believe that the company has competitive advantages over its peers in terms of its presence across consumption and price points of Indian consumers, has pan-India presence and lower execution risks. We have adopted the sum-of-the-parts (SOTP) methodology to arrive at the Target Price of Rs284 for PRIL, translating into an upside of 35% from current levels of Rs210. We have valued PRIL standalone on P/BV basis along with key subsidiaries Future Capital Holdings, HSRIL and Future Bazaar at a discount to current market capitalisation and stake sale basis, respectively. We Initiate Coverage on PRIL with a Buy recommendation. We are positive on VRPL’s scalable business model, which is focused on Tier-II and III value retailing. However, in the current environment, we believe VRPL’s Debt/Equity would rise going ahead to fuel its growth. Hence, we Initiate Coverage on VRPL with a Neutral recommendation. We like Titan Industries as its stable and niche business model will continue to deliver robust Return Ratios as has been the case in the past. We Initiate Coverage on Titan Industries with a Neutral recommendation owing to its rich valuation. November 2008 January 30,28, 2008 For Private Circulation Only - - SebiRegistration No :: INB 010996539 For Private Circulation Only Sebi Registration No 35 Angel Broking Service Truly Personalized TM Industry Overview Retail This page is intentionally left blank November 28, 2008 January 30, 2008 For Private Circulation Only - - SebiRegistration No :: INB 010996539 For Private Circulation Only Sebi Registration No INB 36 Angel Broking Service Truly Personalized TM Industry Overview Retail Companies November 2008 January 30,28, 2008 For Private Circulation Only - - SebiRegistration No :: INB 010996539 For Private Circulation Only Sebi Registration No 37 Angel Broking Service Truly Personalized TM Pantaloon Jain Irrigation Retail (India) Initiating Coverage BUY Price Target Price Investment Period Rs210 Rs284 12 Months ‘Future’ is bright PRIL, India's biggest Retailer operating under the umbrella of the Future Group, has grown at a faster CAGR of around 69% over FY2006-08 vis-à-vis peers. PRIL operates in all product categories and formats and hence induces maximum consumption while catering to all strata of consumers. PRIL is all set to grow at a CAGR of 35% in Net Sales and 46% in PAT over FY2008-10E. At Rs210, the stock is trading at 14.3x FY2010E Earnings and 1.8x FY2010E P/BV. We Initiate Coverage on the stock, with a Buy recommendation and SOTP Target Price of Rs284, translating into an upside of 35%. Touches all Consumption, Price and Purchase points of Consumers: PRIL caters to almost all consumer needs through various Product categories and Private Labels, various formats from Small Stores to large Hypermarts across India and touching all price points. PRIL has a strategy of entering the unorganised segments of Retail, organise them and in the process provide better services to the consumers. We believe that in the current Retail scenario in India, this strategy will not only yield benefits for PRIL but will also drive growth of Organised Retail in India. PRIL in a better position to counter risks: PRIL has tied up 22mn sq.ft. of its targeted Retail space requirement of 26mn sq.ft. by FY2012 with various developers as an anchor tenant at rentals below Industry standards. This gives PRIL a strong first-mover advantage in major cities and towns and will embark it on faster growth pace, improve its PAT Margins from 2.5% in FY2008 to 2.9% in FY2010E and counter domestic as well as overseas competition. Other Future Group businesses converge to Retail: Future Group's subsidiaries operate in domains that converge to PRIL's Retail business. For instance, Future Logistics takes care of back-end operations and distribution while Future Capital Holdings provides consumer goods financing and invests in Retail destinations. This eclectic mix of auxiliary support businesses help induce and enhance consumption of the Indian consumers and in the process aid PRIL’s growth. Stock Info Sector Market Cap (Rs cr) Beta 52 Week High / Low Avg Daily Volume Face Value (Rs) Retail 3,679 0.8 796/177 73118 2 BSE Sensex Nifty 9,093 2,755 BSE Code NSE Code Reuters Code Bloomberg Code 523574 PANTALOONR PART.BO PF@IN Shareholding Pattern (%) Promoters MF / Banks / Indian FIs FII / NRIs / OCBs Indian Public / Others 46.5 21.7 24.0 7.8 Key Financials (Standalone) Y/E June (Rs cr) Net Sales % chg Net Profit % chg EBITDA Margin (%) EPS (Rs) P/E (x) P/BV (x) RoE (%) RoCE (%) EV / Sales (x) EV/EBITDA FY2007 3,237 84.1 119.9 89.4 6.7 7.7 27.1 3.9 14.8 9.9 1.4 20.8 FY2008E 5,049 56.0 126.0 5.1 9.1 7.9 26.6 2.7 8.6 11.5 1.1 11.8 FY2009E 6,900 36.7 181.3 43.9 9.3 9.9 21.2 1.9 8.2 11.3 0.8 8.6 FY2010E 9,170 32.9 268.9 48.3 9.5 14.7 14.3 1.8 10.0 12.5 0.7 7.4 Abs. Sensex (%) 3m 1yr 3yr (1.8) (35.3) (55.0) Pantaloon (%) (29.9) (72.2) (32.6) Raghav Sehgal Tel: 022 - 4040 3800 Ext: 309 E-mail: raghav.sehgal@angeltrade.com Source: Company, Angel Research, Note: BV has been adjusted for investments November 28, 2008 January 30, 2008 For Private Circulation Only - - SebiRegistration No :: INB 010996539 For Private Circulation Only Sebi Registration No INB 38 Angel Broking Service Truly Personalized TM Pantaloon Retail (India) Retail Company Background Pantaloon Retail (India) PRIL is India's leading Retailer that operates multiple Retail formats both in the Value and Lifestyle segments of the Indian Consumer market. The company operates over 10mn sq.ft. of Retail space, has over 1,000 stores across 61 cities in India and employs over 30,000 people. The company's leading formats include Pantaloon - a chain of fashion outlets, Big Bazaar - a unique Indian Hypermarket chain, Food Bazaar - a Supermarket chain and Central - a chain of seamless destination Malls. Some of its other formats include Depot, Shoe Factory, Brand Factory, Blue Sky, Fashion Station, aLL, Top 10, mBazaar and Star and Sitara. The company also operates an online portal, futurebazaar.com. Subsidiary, Home Solutions Retail (India), operates Home Town, a large format home solutions store, Collection i, sells home furniture products and eZone caters to the consumer electronics segment. Future Group Future Group is one of the country's leading business groups present in Retail, Asset Management, Consumer Finance, Insurance, Retail Media, Retail Spaces and Logistics. Future Group companies includes, Future Capital Holdings (FCH), Future Generalli India Indus League Clothing and Galaxy Entertainment that manages Sports Bar, Brew Bar and Bowling Co. Future Capital Holdings, the group's financial arm, focuses on Asset Management and Consumer Credit. It manages assets worth over US $1bn that are being invested in developing Retail Real Estate and Consumer-related Brands and Hotels. The group's JV partners include Italian Insurance major, Generalli, French Retailer ETAM group, US-based stationary products players Retailer, Staples Inc, UK-based Lee Cooper and India-based Talwalkar's, Blue Foods and Liberty Shoes. November 2008 January 30,28, 2008 For Private Circulation Only - - SebiRegistration No :: INB 010996539 For Private Circulation Only Sebi Registration No 39 Angel Broking Service Truly Personalized TM Pantaloon Retail (India) Retail Future Group Companies November 28, 2008 January 30, 2008 For Private Circulation Only - - SebiRegistration No :: INB 010996539 For Private Circulation Only Sebi Registration No INB 40 Angel Broking Service Truly Personalized TM Pantaloon Retail (India) Retail Investment Argument Touches all Consumption, Price and Purchase points of Consumer Consumers' need is PRIL's command PRIL to benefit from reaching out to consumers through various price and consumption points PRIL, which started off as an Apparel Retailer, over the years has gradually expanded and diversified to capture all Consumption and Price Points for an Indian consumer. PRIL today caters to the entire consumption requirement of an Indian Consumer. Exhibit 1: PRIL Formats Category PFCE Break-Up of Indian Consumer 63% 15% 7% 3% 8% Food, Groceries & Beverages Fashion, Footwear, Home & Jewellery etc Electronics Telecom & IT Wellness & Beauty Leisure, Entertainment & Books 3% Source: Company, Angel Research Source: Company, Angel Research PRIL currently caters to almost all the needs of the Indian consumers right from Fashion, Footwear, Jewellery, Wellness, Personal Care and Home Solutions to FGB. PRIL's strategy is to penetrate the highly unorganised segments of Retailing, organize it, and in the process, benefit from the category growth. In its early years, PRIL had followed this strategy with much success in its Apparel business. PRIL can take credit for pioneering and setting up the right platform for the Clothing and Textile segment, which today has the highest share in Organised Retail at 40% and is expected to grow by 60-70% over the next 3 - 4 years. PRIL repeated this success in Value Retailing with Big Bazaar sensing the opportunity in the segment and commenced catering to consumers at low price points under one roof. November 2008 January 30,28, 2008 For Private Circulation Only - - SebiRegistration No :: INB 010996539 For Private Circulation Only Sebi Registration No 41 Angel Broking Service Truly Personalized TM Pantaloon Retail (India) Retail PRIL is now trying to replicate its success in Pantaloon and Big Bazaar adopting a similar strategy in other categories. Hence, it has forayed into categories such as FGB, Electronics, Home Solutions, Beauty and Personal Care, etc. that have relatively lower penetration of less than 5-7% in the Organised Retail Sector but have high growth potential in the range of 40-60%. Overall, we believe these initiatives will enable PRIL to increase size of the consumption basket of consumers along with increase its marketshare in the various categories within that consumption basket. High growth across Formats to cover all purchasing points Presence across Formats in line with consumer preferences and needs At the end of FY2008, PRIL was present in 63 cities across India with 41 Pantaloon stores, 90 Big Bazaar outlets, 136 Food Bazaar stores, 7 Central stores and 215 Home Solutions Retail stores (including shop in shops). We believe it is imperative for Retailers today to reach out to the maximum possible consumers from all demographic segments through different formats at different locations, covering all purchasing points and in the process registering higher Revenues. We believe Retailers who are successful in capturing high growth in various product categories through different formats would be able to grow at higher pace than others. PRIL is one such Retailer, which has the ability to grow at a fast pace covering all purchasing points of Indian consumers and drive higher Revenues. PRIL (includes Pantaloon, Central and Big Bazaar) PRIL Retail space to grow at a CAGR of 39% over FY2008-10E to 14.9mn sq. ft. Pantaloon is the flagship store of the Future Group operating in the Lifestyle segment Retailing Apparels. Pantaloon stores have a variety of categories like casualwear, ethnicwear, formalwear, partywear and sportswear for men, women and kids. By end of FY2008, Pantaloon had 1.1mn sq.ft. of Retail space spread across 42 stores. PRIL's Central format is a concept Mall aimed at providing urban consumers the total shopping experience with numerous brands on offer across product categories under one roof in the heart of the city. In FY2008, Central occupied around 0.87mn sq.ft. spread across seven Malls. Big Bazaar, PRIL's Hypermart format, retails products across categories meeting Indian consumer requirements at low price points. Big Bazaar grew by around 60% in FY2008, both the number of stores as well as Retail space showcasing that there's still substantial upside left in the Indian Retail space for Hypermarts. Overall, we estimate PRIL Retail space (excluding Home Solutions Retail India (HSRIL) and other formats) to grow at a CAGR of 39% over FY2008-10E to 14.9mn sq.ft. by FY2010E from around 7.7mn sq.ft in FY2008. Home Solutions Retail India (HSRIL) High-growth HSRIL to grow its Retail Space at 49% over FY2008-10E HSRIL is a subsidiary of PRIL that caters to all requirements to make a home from a scratch. HSRIL operates both in the Value and Lifestyle segments providing home improvement products from Furniture, Fittings, Electronic Appliances to Kitchenware. HSRIL operates in the November 28, 2008 January 30, 2008 For Private Circulation Only - - SebiRegistration No :: INB 010996539 For Private Circulation Only Sebi Registration No INB 42 Angel Broking Service Truly Personalized TM Pantaloon Retail (India) Retail Value Retailing segment through Electronics Bazaar in Home Appliances and Electronics category and Furniture Bazaar in the Furniture and Furnishings category. HSRIL targets high-end consumers through its Lifestyle offering of Home Town and eZone for furniture and electronics respectively. In FY2008, HSRIL posted 79% growth in terms of number of stores and a whopping 176% in terms of Retail space to 1.4mn sq.ft. spread over 59 stores. Going forward, we expect this high-growth trend to continue with HSRIL set to grow its Retail space at a CAGR of 49% over FY2008-10E to 3.1mn sq.ft. Food Bazaar and Other Formats Other Formats to grow at 33% and constitute 11% of PRIL’s consolidated Retail space by FY2010E Other formats include all other formats of PRIL like Foodbazaar, The Brew Bar, Shoe Factory, Café Hollywood, Star & Sitara, Tulsi, Pairs, aLL, Blue Sky, Depot, Navras, F 123, etc. These formats are aimed at organising the low penetration segments that have high-growth potential. Food Bazaar, PRIL's FGB store format, aims to penetrate into the highly unorganised and under-penetrated segments of Food Retailing in India. Food Bazaar has clocked healthy CAGR of 54% in terms of number of stores and 84% in terms of the Retail space in FY2008 to 0.33mn sq.ft. spread over 134 stores. Overall, we estimate that the Retail space of Food Bazaar and other formats would grow at a CAGR of 33% to reach 6,00,000 sq.ft. by FY2010E, most of which would be captured by Food Bazaar. PRIL's format mix is also expected to change in line with consumer needs and format maturity. Mature formats like Pantaloon and Big Bazaar are expected to grow at a lower rate than newer formats like Home Retail, Central, Other formats, etc. as they increase marketshare in their respective fragmented segments. The share of Central and HSRIL is estimated to increase in PRIL's Retail pie and combined is expected to capture 28% of PRIL's Retail space by FY2010E. PRIL to capture 43% of Hypermart space in India by FY2011E PRIL is expected to continue its dominance in the Hypermart space with Big Bazaar and Central constituting around 7.4% of the Organised Retail space of 175mn sq.ft. and around 43% of Hypermart Retail space of 30mn sq.ft.in India by FY2011E, emerging as a major player in the Organised Retail Sector. Exhibit 2: PRIL (Consolidated) - Retail Space break-up FY2008 Food Bazaar 4% Central 9% Others 7% FY2010E Food Bazaar 3% Others 8% Central 11% Pantaloon 11% Big Bazaar 54% Pantaloon 10% Big Bazaar 51% HSRIL 15% HSRIL 17% Source: Company, Angel Research November 2008 January 30,28, 2008 For Private Circulation Only - - SebiRegistration No :: INB 010996539 For Private Circulation Only Sebi Registration No 43 Angel Broking Service Truly Personalized TM Pantaloon Retail (India) Retail Private Labels - Fuelling consumption via Category growth PRIL to develop Private Labels to expand categories PRIL has increased its focus on Private Labels in the past few years because of its multi-fold advantages. Private Labels serve Retailers' dual purpose of boosting category growth by increasing consumption and improving Gross Margins of the players. PRIL has gone one step ahead to make its Private Labels national brands. We believe this is a proactive step and a natural progression for PRIL as on account of its presence across India, which should make its Private labels national brands as well. Private Labels constitute an important part of PRIL's Top-line and Bottom-line. They contribute more than 70% of Pantaloon’s Revenues and around 50% to Food Bazaar's Revenues. Big Bazaar also stocks Private Labels that contribute 25% in Apparels, 10-12% in FGB and 10-12% in the Electronics segments. Going forward, we believe that PRIL will maintain its Private Label mix, which would aid Margin improvement. Exhibit 3: PRIL's Private Labels Segment Apparel Electronics FGB Home Care Home Furnishings Private Labels Chalk, Bare Denim, Honey, RIG, John Miller, Annabelle, etc. Koryo, Sensei Fresh & Pure, Tasty Treats Caremate, Cleanmate Dreamline PRIL better-placed to counter risks PRIL enjoys First-Mover advantage PRIL to benefit from First Mover advantages with presence in 50 cities PRIL has been proactive in expanding in various categories, formats and geographies, which we believe has given it the first-mover advantage. PRIL is ahead of its peers on the innovation curve in terms of format and has diversified into various product categories covering the entire spectrum of consumer spending. This gives PRIL a head-start in terms of capturing maximum share of the wallet of the ever-increasing consumer base of India. PRIL is currently present in around 50 cities across India with 65% of its Revenue coming from Tier-I cities, which are expected to drive near-term growth of Organised Retail in India. PRIL is expected to continue to expand in the same proportion going ahead as well and build on its firstmover advantage. The company has also made significant headway in terms of reaching out to consumers even in the smaller Tier-II and III cities. Given that long-term growth of Organised Retail in India would be driven by these cities and that these cities have limited appetite to absorb more than 1 or 2 big Retailers, we believe PRIL is well placed to emerge a significant player in these cities v/s competition. November 28, 2008 January 30, 2008 For Private Circulation Only - - SebiRegistration No :: INB 010996539 For Private Circulation Only Sebi Registration No INB 44 Angel Broking Service Truly Personalized TM Pantaloon Retail (India) Retail Well poised to take on global players We believe that sooner than later, the Government of India will open the Retail Sector to global Retailers. We believe at that point in time, the domestic Retailers who would have expanded and understood consumers across India would be better placed to take on the challenge from the global Retailers. We believe PRIL is one such player with a dominant and instant recall in consumers' minds, and has garnered highest marketshare in Organised Retailing in India. It would be difficult for the global players to challenge PRIL in terms of width and depth of Category assortment and Format offering. High Execution Capability and Low Execution Risks PRIL has unique competitive advantage on account of low execution risks as it has tied up Real Estate and anchor tenant status In FY2008, PRIL added 4.2mn sq.ft. of Retail space (including HSRIL) with around 2mn sq. ft. coming in during the third and fourth quarter of the fiscal. In the current fiscal, it has already added around 1.6mn sq.ft. to its Total Retail space (including HSRIL) 11mn sq.ft. as at the end of September 2008. This shows PRIL's high execution capability to expand apart from giving it the strategic advantage to tackle competition. PRIL has already tied up 22mn sq.ft. of Retail space with developers at lower-than-industry average of Rs50 per sq.ft. We believe this will take PRIL closer to achieving its target of 26mn sq.ft. Retail space by FY2012E and give it a three-point competitive advantage, viz., PRIL becomes an anchor tenant occupying major portions of the Mall or the shopping complex that attracts footfalls to the Mall and drive the company’s various business categories. Being an anchor tenant also gives PRIL substantial bargaining power with the developers as it can put pressure on the developer to complete the construction work without delay as far as possible. Such bargaining power also reduces PRIL's expansion risks to some extent. With the progress of time, developed malls become prime property and achieve landmark status in the local area, therefore witnessing a rise in Rentals. Thus, with time Retail space gets expensive in these developed malls and Retailers feel the pressure on their Margins due to high Rentals. Hence, PRIL is well placed as it has tied up Retail space early at lower Rentals. It is estimated that PRIL, including Pantaloon, Big Bazaar and Central will garner around 14.9mn sq.ft. by FY2010E, while HSRIL is estimated to touch 3.1mn sq.ft. by FY2010E. The Other Formats are expected to touch 6,00,000 sq.ft. by FY2010E. We believe that PRIL's high execution capability combined with low execution risks gives it a unique competitive edge which other retailers in the country lack. We believe that it is this advantage backed by a good management that would help post growth not only in Top-line but in Bottom-line as well resulting in higher Profitability. November 2008 January 30,28, 2008 For Private Circulation Only - - SebiRegistration No :: INB 010996539 For Private Circulation Only Sebi Registration No 45 Angel Broking Service Truly Personalized TM Pantaloon Retail (India) Retail Other Future Group businesses converge to Retail Vertical integration to unlock value in Future group subsidiaries Vertical Integration to result in decreasing costs and higher Revenues for PRIL at the consolidated level The Future Group has vertically integrated through Future Logistics, which support its Retail operations. It has also resulted in cost benefits for the group in its Supply Chain, which it could pass on to consumers. We believe that this vertical integration will not only result in savings at back-end at the group level, it will also generate additional Revenues by providing the same services to other players in the Retail and allied Industries. Future Group has horizontally integrated also with Future Media and FCH to drive consumption. Future Media provides in-shop entertainment to keep consumers in the store for longer duration in turn driving sales. FCH provides consumers loans to facilitate big-ticket purchases. Future Generalli General Insurance secures the big-ticket purchases and encourage consumers to buy more and still feel secure with their belongings. We believe there is substantial potential locked in these subsidiaries from which PRIL could benefit in the future. PRIL's subsidiaries specialise in providing auxiliary and back-end support services that would not only improve Future Group's Retail operations but would also play an important role in growth of Organised Retail in India as a whole. Future Capital Holdings (FCH) - Empowering Consumers FCH is one of the premier listed investment advisors in India with around US $1.1bn under advice, and domain expertise in Private Equity and Real Estate. The funds advised by FCH Real Estate Advisory include: Kshitij Venture Capital Fund: It is A US $90mn domestic fund that invests in developing high quality Retail destinations in India. The fund has invested in developing around 5mn sq.ft. of Retail space in 11 high-growth Tier-II cities. Horizon Realty LLC: It is a US $350mn international fund that invests in developing 'Market Cities' or integrated destinations for shopping, leisure and entertainment. The fund is investing in developing around 15mn sq.ft. of Retail space across six projects in Mumbai, Bangalore, Pune and Hyderabad. Indus Hotel Ventures LLC: It is a US $200mn international hotel fund that will invest in building business class hotels across the country. The fund plans to capitalise on the opportunity in India for quality business hotels by leveraging Future Group's national network and strong deal-sourcing relationships and existing partnerships. Indospace Logistics Partners: It is a logistics fund set up in JV with Realterm Global, a leading North American Industrial Real Estate investment firm. The fund will invest in developing industrial warehousing facilities across India. November 28, 2008 January 30, 2008 For Private Circulation Only - - SebiRegistration No :: INB 010996539 For Private Circulation Only Sebi Registration No INB 46 Angel Broking Service Truly Personalized TM Pantaloon Retail (India) Retail Exhibit 4: FCH Business Mix Assets worth over US $1.1 billion under advice 145 points of presence in 30 cities • Due Diligence Capabilities across asset classes • Access to entrepreneurs Source: Company, Angel Research Retail Financial Services Future Money to induce consumption through easy consumer finance Future Money focuses on customers across Tier-I and II cities, both of which continue to be under served by other players due to customer acquisition challenges. This business leverages the large customer base and Retail network of the Future Group to efficiently serve these segments with relative cost savings. We believe that FCH has a significant role to play in driving Organised Retail in India by investing in Retail destinations and providing consumer finance through Future Money. Future Money is expected to play a key role in stimulating consumption as it would provide consumers the convenience of hassle-free and on-the-spot loans to buy big-ticket items. This way a consumer doesn't think twice before taking a purchase decision. We estimate FCH to contribute directly to PRIL's Top-line growth by inducing EMI-led consumption in an economy where EMI contributes a meagre 3% of Total Retail Sales. FCH is also involved in the creation of Retail destinations, which are expected to support PRIL's future expansion plans. November 2008 January 30,28, 2008 For Private Circulation Only - - SebiRegistration No :: INB 010996539 For Private Circulation Only Sebi Registration No 47 Angel Broking Service Truly Personalized TM Pantaloon Retail (India) Retail Future Logistics - Hero behind the scene FLSL to cut costs for Future Group Top-line and augment The Future Group is looking at a three-fold expansion by FY2011E and it is imperative to have strong back-end operations to service the front-end of the Retailing business. Future Logistics Solutions (FLSL), a wholly-owned subsidiary of the Future Group was incorporated with an investment of Rs400cr to meet the group's large captive SCM requirements. FLSL is also looking at extending its services to other industry players and is targeting Revenues of Rs800cr by FY2010E. FLSL expects 50% of its Revenues to come from outside the group by FY2011E. FLSL is the only Indian logistics firm, which has developed expertise in major consumer and consumption related categories. Some reasons why FLSL would fuel PRIL's Retail growth include: Increase in truck fleet to aid Retail growth - FLSL plans to acquire a fleet of 1,400 specially designed trucks for transportation of goods by FY2010E. Out of these, 800 trucks would be for intra-city movement, which would reduce delays in inventory turnovers at PRIL's Retail outlets, leading to higher sales. Increase in warehouse space - FLSL proposes to increase its warehouse space from 2mn sq.ft. in FY2007 to 5mn sq.ft. by FY2010E and to 7.5mn sq.ft. by FY2011E. FLSL plans to operate around seven new mega-merchandising hubs ranging from 70,000-1,00,000 sq.ft. and 30 smaller warehouses in cities across the country by FY2011E. November 28, 2008 January 30, 2008 For Private Circulation Only - - SebiRegistration No :: INB 010996539 For Private Circulation Only Sebi Registration No INB 48 Angel Broking Service Truly Personalized TM Pantaloon Retail (India) Retail Financial Outlook Robust Net Sales growth to continue on the back of aggressive expansion PRIL Net Sales to grow at a CAGR of 35% over FY2008-10E to Rs9,170cr on back of aggressive store roll-outs PRIL's growth in the past has been primarily driven by high pace of expansion supported by its strategy to garner maximum share of the Indian consumers’ wallet. PRIL has grown at a CAGR of around 71% over FY2005-08 to Rs5,049cr. Going ahead, we expect PRIL to grow at a CAGR of 35% over FY2008-10E to Rs9,170cr. We believe that the next phase of growth for PRIL would be driven by aggressive store roll-outs over the next two years. On a standalone basis, PRIL is expected to grow its Retail space at a CAGR of 39% over FY2008-10E to 14.9mn sq.ft. On the other hand, HSRIL and Other Formats are expected to grow their Retail space at a CAGR of 48% over FY2008-10E to 3.1mn sq.ft. PRIL plans to reach 26mn sq.ft. at the consolidated level by FY2012. In the current scenario, we believe that in spite of PRIL tying up its Retail space, there would be delays in the store rollouts by around two quarters. We estimate PRIL to reach its medium-term target of 30mn sq.ft. Retail space, at the consolidated level by FY2013E. Exhibit 5: PRIL to more than Double its Retail space by FY2012E PRIL (Standalone) 30 26.1 Total (Incl. HSRIL and Other Formats) Square Feet in Million 25 20 15 12.0 10 5 0 FY2008 FY2009E FY2010E 9.4 7.7 14.6 14.5 18.6 18.4 22.2 22.0 FY2011E FY2012E Source: Company, Angel Research EBITDA Margins to expand EBITDA Margins to expand to 9.5% in FY2010E from 9.1% in FY2008 PRIL's EBITDA Margins have been on an uptrend during FY2006-08 as it was focused on improving its operational efficiencies and prune expenses. This resulted in EBITDA growing at a staggering CAGR of 257% over the mentioned period to Rs460cr in FY2008 from Rs36cr in FY2006. The big domestic Retailers along with their global partners require talent to manage their high growth in Retail business. It is expected that these new entrants with deep pockets will try to poach talent from the incumbents to run their businesses. We believe that PRIL, being the leader in the Retail Industry, will not only be able to retain its employees but will also be able to stem its employee costs. Further, with increasing efficiencies in back-end operations, we November 2008 January 30,28, 2008 For Private Circulation Only - - SebiRegistration No :: INB 010996539 For Private Circulation Only Sebi Registration No 49 Angel Broking Service Truly Personalized TM Pantaloon Retail (India) Retail believe that PRIL's manufacturing expenses will also reduce in FY2009E and FY2010E. Therefore, we have factored in a decline of 39bp in manufacturing expenses in our FY2009 and FY2010 estimates. This reduction in manufacturing expenses coupled with decrease in personnel costs is expected to boost EBITDA Margins to 9.3% and 9.5% in FY2009E and FY2010E respectively, from current levels of 9.1%. In absolute terms, we estimate EBITDA to grow at a CAGR of 38% over FY2008-10E to Rs871cr. Exhibit 6: EBITDA Margin Trend (Rs cr) 1,200 1,000 800 600 400 200 0 FY2007 Source: Company, Angel Research EBITDA 9.1% EBITDA Margin % 9.5% 9.3% 10.0 9.0 8.0 7.0 6.0 5.0 4.0 3.0 2.0 1.0 0.0 6.7% FY2008 FY2009E FY2010 E Net Profit to post 47% CAGR over FY2008-10E Net Profits to grow at CAGR of 46%; Net Margins to expand to 2.9% in FY2010E from 2.5% in FY2008 PRIL's PAT, on standalone basis, grew at a CAGR of 41% over FY2006-08 to Rs126cr on the back of cost savings. Going ahead, we estimate PRIL's Net Profit to grow at a CAGR of 46% over FY2008-10E to Rs268.9cr due to the improvement in Asset to Turnover ratio, which would result in Net Margins improving from 2.5% in FY2008 to 2.6% and 2.9% in FY2009E and FY2010E, respectively. Exhibit 7: Net Profit Trend (Rs cr) 400 350 3.7% 300 250 2.5% 200 150 100 50 0 FY2007 FY2008 FY2009E FY2010 E 119.9 126.0 181.3 2.0 1.5 1.0 0.5 0.0 2.6% Profit After Tax PAT Margin 268.9 2.9% % 4.0 3.5 3.0 2.5 Source: Company, Angel Research November 28, 2008 January 30, 2008 For Private Circulation Only - - SebiRegistration No :: INB 010996539 For Private Circulation Only Sebi Registration No INB 50 Angel Broking Service Truly Personalized TM Pantaloon Retail (India) Retail Return Ratios to improve PRIL to clock near 17% RoE by FY2013E PRIL reported lower Return Ratios in FY2008 compared to FY2007 due to the high pace of expansion resulting in lower Asset-to-Turnover ratio. We believe that with 22mn sq. ft. Retail space tied up till FY2010E, PRIL is at the fag end of its expansion phase. Going ahead, Return Ratios are expected to improve gradually by FY2013E with the improvement in Asset Turnover ratio. Sales are estimated to grow at a CAGR of 35% over FY2008-10E, which is in line with the Industry average. Exhibit 8: DuPont Analysis Parameters Net Profit/ Pretax Profit (%) Pretax Profit/ EBIT (x) EBIT/ Net Sales (x) Net Sales/ Assets (x) Assets/Equity (x) RoE* (%) FY2008 64.4 0.52 7.5 1.23 2.22 6.8 FY2009E 64.4 0.54 7.7 1.33 2.05 7.3 FY2010E 64.4 0.57 8.0 1.42 2.32 9.7 FY2011E 64.4 0.61 8.3 1.62 2.34 12.4 FY2012E 64.4 0.65 8.9 1.65 2.41 14.8 FY2013E 64.4 0.69 9.3 1.77 2.30 16.9 Source: Angel Research; Note: *Year End Substantial investments lined up to fuel growth PRIL to invest Rs6,000cr over the next four years to fuel its ambitious growth We believe that Retailers focused on high pace expansions would be the ones better placed to take on the challenges posed by both domestic as well as global competition. PRIL has lined up investments of Rs6,000cr or US $1.5bn over the next four years. We expect PRIL to invest Rs3,000cr till FY2010E while maintaining a Debt to Equity ratio of around 1.2x till FY2010E. PRIL had issued 2.12cr warrants to its promoter group, Pantaloon Employee Welfare Trust and select employees of the company in August 2007 at an exercise price of Rs500/share to raise Rs1,060cr. Out of this, around 85 lakh warrants were exercised in FY2008, bringing in around Rs425cr of Equity. We estimate the balance 1.27cr warrants to get exercised before end FY2009E, bringing in additional equity of Rs635cr. We expect remaining fund requirements to be met through PRIL's Internal accruals. November 2008 January 30,28, 2008 For Private Circulation Only - - SebiRegistration No :: INB 010996539 For Private Circulation Only Sebi Registration No 51 Angel Broking Service Truly Personalized TM Pantaloon Retail (India) Retail Concerns Employee Retention - The Biggest Challenge PRIL to face challenges in retaining its employees to run high-growth businesses The Future Group has a good senior management team and business friendly hierarchical structure with each division in PRIL like Food Bazaar, Big Bazaar having separate teams headed by a CEO. This inculcates lot of entrepreneurial spirit, leads to healthy competition and freedom to run the business of a division separately. Further, with India's big Industry houses foraying into Retail and global players entering India through JVs with Indian partners and India looking at opening the Retail Sector gradually, we believe there will be a crunch on Top Management talent to run the businesses. Hence, we expect a lot of poaching to happen across the Industry for Top management positions. The Future Group, a pioneer in the Retail space in India and virtually being the face of the Retail Industry in India, would be the target for poaching Top management personnel as that cadre would be well- experienced and have in-depth understanding of the Indian market. The Future Group faces serious challenges to retain its employees, and we feel this will be the Group's biggest challenge going ahead. Delay in Retail development - Learning phase for developers Even though PRIL has a lot of bargaining power to influence the pace of Retail and Mall development in India due to its anchor tenant status, there's still the risk of delay in Mall development due to various unavoidable reasons. Mall development is still a new concept in India and Real Estate developers are faced with numerous Regulatory hurdles that take its own time to get sorted out. We believe that it is a learning process for both the Retailers and Mall developers, and that the current phase of delays would soon be a thing of the past. It is expected that the Future Group would achieve its target of 26mn sq. ft. by FY2012E and reach 30mn sq.ft. by FY2013E. Resistance to Modern Retail Opposition by Traditional Retailers acquiring political overtones and resulting in difficult Regulatory measures Few retailers in India have faced opposition in opening up stores in some of the cities. Such opposition combined with trade lobbyists has acquired political overtones, which is unhealthy for future growth of Retail in India. However, Pantaloon is a well-accepted brand and this far has not faced any opposition in terms of opening up new stores and expansion. Nonetheless, such a threat looms large over the business expansion. We feel that though this is an expansion challenge for retailers in India in general and PRIL in particular, the latter due to the virtue of the goodwill that it has generated over the years, is in a better position to tackle any opposition. Supply chain management (SCM) - Links too long SCM in Indian Retail today comprises many intermediaries that push costs upwards. Modern Retail the worldover has been able to avail the benefits of cutting short the Supply Chain. However, in India, this has not been possible this far as the Supply Chain is still too inefficient here and has one of the highest pilferage rates in the world. PRIL is faced with this challenge but, compared to its peers it is in a better position due to a specialised logistics firm in the form of FLSL taking care of PRIL’s backend. November 28, 2008 January 30, 2008 For Private Circulation Only - - SebiRegistration No :: INB 010996539 For Private Circulation Only Sebi Registration No INB 52 Angel Broking Service Truly Personalized TM Pantaloon Retail (India) Retail Inventory management change would impact Profitability PRIL has the system of valuing finished goods inventory lying in stores at cost less markup. On the other hand, PRIL's peers in the Industry value the same at cost. The inherent hazard of using this system of Valuing Finished Goods Inventory is that profitability gets affected with the change in Inventory Management Policy to lower of cost or market value. Profitability would also get impacted in case the mark-up on the products change. November 2008 January 30,28, 2008 For Private Circulation Only - - SebiRegistration No :: INB 010996539 For Private Circulation Only Sebi Registration No 53 Angel Broking Service Truly Personalized TM Pantaloon Retail (India) Retail Outlook and Valuation PRIL enjoys a competitive positioning vis-a-vis its peers PRIL is a key player in the Indian Retail Industry. In fact, PRIL has been around before Organised Retail became the buzzword for India. PRIL has seen the highs and lows of Organised Retail and has matured over the years to be in a leadership position to counter risks faced by other players in the Industry. We are positive on PRIL, as we believe it has the right strategy in place driven by a good management to expand and grow at a faster rate and improve Margins. We believe that PRIL has a competitive advantage over other players in terms of a scalable business model, pan-India presence and lower execution risks. Further, we expect PRIL to gain from unlocking values in its various subsidiaries whose services congregate at the point of consumption of the Indian consumer. PRIL is estimated to achieve 17% RoE by FY2013E on the back of high growth and rapid expansion At Rs210, the stock is trading at 14.3x FY2010E Earnings and 1.8x FY2010E P/BV. Valuing PRIL (standalone), we estimate it to register RoE of 17% FY2013E onwards. We have conservatively valued PRIL on P/BV basis and are positive that the stock would witness a re-rating once the macro-environment improves. We believe a two-stage growth model would be appropriate to factor in medium-term high growth and long-term stable growth. We estimate the high growth stage to last till FY2019, registering a CAGR of 20%. After FY2019, we estimate PRIL to grow at a CAGR of 7% till perpetuity. We have assumed Cost of Equity as 14% and using the same provides us with a fair FY2010E P/BV of 1.8x, valuing PRIL's standalone business at Rs218.We have valued PRIL's key subsidiaries, viz. FCH at a discount on current market capitalisation basis and HSRIL and Future Bazaar at a discount on stake sale basis. We have given discount to the value of PRIL's stake in HSRIL and Future Bazaar in line with the correction in the markets that has happened since the stake sale in these companies. We have given a lesser discount to market capitalisation attributed to PRIL in FCH as it is a listed firm with PRIL holding a mojority stake and the stock has corrected in line with the market. We have valued PRIL's stake in FCH, HSRIL and Future Bazaar at Rs33, Rs13.2 and Rs19.9 respectively, thereby adding a value of around Rs66 to PRIL's Fair Value of Rs218. We Initiate Coverage on PRIL - our Top Pick - with a Buy recommendation and SOTP Target Price of Rs284, translating into an upside of 35%. Exhibit 9: PRIL (Standalone)- Two Stage Growth Model Assumptions and Valuation Growth Rate in High Growth period up to FY2019 (%) Terminal Growth Rate beyond FY2019 (%) Estimated RoE FY2013E onwards (%) Cost of Equity (%) Fair P/BV for PRIL (x) Fair Value per share Source: Company, Angel Research 20 7 17 14 1.8 Rs218 November 28, 2008 January 30, 2008 For Private Circulation Only - - SebiRegistration No :: INB 010996539 For Private Circulation Only Sebi Registration No INB 54 Angel Broking Service Truly Personalized TM Pantaloon Retail (India) Retail Subsidiary Valuations Exhibit 10: Future Capital Holdings Current Market Capitalisation (Rs cr) Pantaloon Share Holding (%) Mkt Cap attributed to PF (Rs cr) Discount on account of Pantaloon's Strategic Investment (%) Value of Pantaloon's share after discount (Rs cr) Number of outstanding Pantaloon shares (Rs cr) Fair Price per share (Rs) Source: Company, Angel Research 873 75 655 10 65.5 18.3 33.0 Exhibit 11: HSRIL Stake Sold by PRIL in Feb 2007 (%) Amount (Rs cr) Valuation of the firm (Rs cr) PRIL's Stake (%) Value of PRIL's stake (Rs cr) Discount on account of Pantaloon's Strategic Investment (%) Value of PIRL's stake after discount (Rs cr) No. of Shares Value per share (Rs) Source: Company, Angel Research 21 120 571.4 73.3 419 42 242 18.3 13.2 Exhibit 12: Future Bazaar Stake Sold by PRIL (%) Amount (Rs cr) Valuation of the firm (Rs cr) PRIL's stake (%) Value of PRIL's stake (Rs cr) Discount on account of Pantaloon's Strategic Investment (%) Value of PIRL's stake after discount (Rs cr) No. of shares Value per share (Rs) Source: Company, Angel Research 15 112.5 750.0 84.7 635.0 43 364.2 18.3 19.9 Exhibit 13: Overall SOTP Valuations Core Business Value Per Share (Rs) FCH Value Per Share (Rs) HSRIL Value Per Share (Rs) Future Bazaar Value Per Share (Rs) Target Price (in Rs.) Source: Company, Angel Research 218 33.0 13.2 19.9 284 November 2008 January 30,28, 2008 For Private Circulation Only - - SebiRegistration No :: INB 010996539 For Private Circulation Only Sebi Registration No 55 Angel Broking Service Truly Personalized TM Pantaloon Retail (India) Retail Profit & Loss Statement Y/E March Net Sales % chg Total Exp. excl. Int. & Dep. EBIDTA (% of Net Sales) Other Income Depreciation& Amortisation Interest PBT (% of Net Sales) Extraordinary Expense/(Inc.) Tax (% of PBT) PAT % chg Share of Loss in Associate Minority Interest Adj. PAT % chg FY2007 3,237 84.1 3,021 215.5 6.7 92.0 36.9 89.8 180.9 5.6 61.0 33.7 119.9 89.4 119.9 89.4 FY2008 FY2009E 5,049 56.0 4,588 460.5 9.1 3.8 83.4 185.3 195.6 3.9 69.7 35.6 126.0 5.1 126.0 5.1 6,900 36.7 6,260 639.8 9.3 3.8 108.8 253.1 281.6 4.1 100.3 35.6 181.3 43.9 181.3 43.9 Rs crore FY2010E 9,170 32.9 8,299 871.1 9.5 3.8 136.3 321.0 417.6 4.6 148.7 35.6 268.9 48.3 268.9 48.3 Balance Sheet Y/E March SOURCES OF FUNDS Equity Share Capital Reserves& Surplus Shareholders Funds Total Loans Minority Interest Deferred Tax Liability (net) Total Liabilities APPLICATION OF FUNDS Gross Block Less: Acc. Depreciation Net Block Capital Work-in-Progress Investments Current Assets Current liabilities Net Current Assets Total Assets 767.1 92.5 675 131.1 252.0 1,749 359.6 1,390 2,448 1,368.8 175.9 1,193 330.6 586.5 2,634 638.1 1,996 4,106 1,813.5 284.7 1,529 586.5 3,945 782.2 3,163 5,278 29.4 1,063 1,092 1,300 55.8 2,448 31.9 1,815 1,847 2,192 67.8 4,106 36.5 2,542 2,578 2,578 121.5 5,278 FY2007 FY2008 FY2009E Rs crore FY2010E 36.5 2,741 2,777 3,471 201.1 6,450 2,271.0 420.9 1,850 586.5 5,036 1,023.5 4,013 6,450 Cash Flow Statement Y/E March Profit before tax Depreciation Interest (Net) Direct taxes paid Others Inc./ (Dec.) in Fixed Assets Free Cash Flow (Inc)/Dec in Investments Others Issue of Equity Inc./(Dec.) in loans Dividend Paid (Incl. Tax) Interest Paid Inc./(Dec.) in Cash Opening Cash balances Closing Cash balances FY2007 180.9 36.9 89.8 33.0 103.1 446.1 (718.1) (90.3) (108.3) 458.3 698.2 8.8 89.8 141.2 21.8 163.0 FY2008 FY2009E 195.6 83.4 (643.2) 185.3 32.4 192.1 (19.2) 801.2 (820.4) (334.5) (209.6) 627.0 892.2 11.2 185.3 1,322.7 (41.9) 163.0 121.1 281.6 108.8 (885.1) 253.1 46.6 (5.2) (293.4) 114.1 (407.5) 574.2 386.6 12.8 253.1 694.8 287.3 121.1 408.4 Rs crore FY2010E 417.6 136.3 (919.1) 321.0 69.2 (57.2) (170.6) 457.5 (628.1) 893.1 12.8 321.0 559.2 (68.9) 408.4 339.5 Key Ratios Y/E March Per Share Data(Rs) EPS Cash EPS DPS Book Value Operating Ratio (%) Inventory (days) Debtors (days) Creditors (days) Returns (%) RoE RoCE Dividend Payout Valuation Ratio (x) P/E P/E (Cash EPS) P/BV EV / Sales EV / EBITDA 27.1 20.7 3.9 1.4 20.8 26.6 16.0 2.7 1.1 11.8 21.2 13.2 1.9 0.8 8.6 14.3 9.5 1.8 0.7 7.4 14.8 9.9 6% 8.6 11.5 8% 8.2 11.3 6% 10.0 12.5 4% 99.8 49.7 38.8 103.4 44.6 44.8 109.2 44.6 40.3 109.2 44.6 40.0 7.7 10.1 0.5 54.3 7.9 13.1 0.6 79.1 9.9 15.9 0.6 109.0 14.7 22.2 0.6 119.9 FY2007 FY2008 FY2009E FY2010E (Inc)/Dec in Working Capital (649.5) Cash Flow from Operations (271.9) Cash Flow from Financing 1,057.9 November 28, 2008 January 30, 2008 For Private Circulation Only - - SebiRegistration No :: INB 010996539 For Private Circulation Only Sebi Registration No INB 56 Angel Broking Service Truly Personalized TM Pantaloon Retail (India) Retail This page is intentionally left blank November 2008 January 30,28, 2008 For Private Circulation Only - - SebiRegistration No :: INB 010996539 For Private Circulation Only Sebi Registration No 57 Angel Broking Service Truly Personalized TM Jain Irrigation Titan Industries Initiating Coverage NEUTRAL Price Target Price Investment Period Rs932 - ‘Titan’ic Valuations Titan Industries is the world's sixth largest and India's largest manufacturer and retailer of watches and jewellery, which accounts for 35% and 60% of its overall Revenues, respectively. Titan has also forayed into the Eye-care segment recently under the brand name Eye+. The company is all set to grow at a CAGR of 26% in Net Sales and Net Profits respectively, over FY2008-10E. At the CMP of Rs932, the stock is trading at 17.7x FY2010E Earnings and 5.4x FY2010E P/BV. We are positive on the company’s growth prospects. However, we Initiate Coverage on Titan Industries with a 'Neutral' recommendation as we believe the stock discounts the positives fairly well. Only Organised national player in Watch and Jewellery segment: Titan Watches enjoys more than 65% marketshare in the Organised Watch segment and 41% marketshare in Organised Jewellery Retailing. Titan's leadership position enables it to bargain hard with its vendors for bulk discounts resulting in lower cost structure as compared to other regional players. We estimate that this bargaining power of Titan, coupled with the pan-India presence, will enable Titan to expand its EBITDA Margins to 8.3% in FY2010E from 8% in FY2008 and maintain PAT Margins at 4.8-4.9% till FY2010E. Easily Scalable Franchisee Model: Titan operates 85-90% of its stores through the Franchisee Model, which provides scalability to its business. Titan's strong positioning in the respective segments has aided it to attract and scale up its business through the Franchisee Model. The company expects to grow its stores and Total Retail Space at a CAGR of 30% and 34% respectively, over FY2008-10E. We estimate Titan's Topline to grow at a CAGR of 26% over FY2008-10E on the back of rapid expansion in Retail space due to the Franchisee Model. Prudent Gold hedging strategy: Titan derives around 60% of its Revenues from its Jewellery business. Hence, it is imperative for Titan to hedge itself against gold price volatility. In line with this, Titan has a well-defined hedging strategy in place to hedge its exposure to gold. Titan has hedged 95-96% of the gold required for its Jewellery Business. Overall, we believe that Titan has safeguarded up to 57% of its Top-Line against the business risks arising from gold price volatility. Key Financials (Standalone) Y/E March (Rs cr) Net Sales % chg Net Profit % chg EBITDA Margin (%) EPS (Rs) P/E (x) P/BV (x) RoE (%) RoCE (%) EV / Sales (x) EV/EBITDA (x) Source: Company, Angel Research Stock Info Sector Market Cap (Rs cr) Beta 52 Week High / Low Avg Daily Volume Face Value (Rs) Retail 4,138 0.9 1715/710 32644 10 BSE Sensex Nifty 9,093 2,755 BSE Code NSE Code Reuters Code Bloomberg Code 500114 TITAN TITN.BO TTAN@IN Shareholding Pattern (%) Promoters MF / Banks / Indian FIs FII / NRIs / OCBs Indian Public / Others 53.0 9.5 11.9 25.6 FY2007 2091 45.2 99.8 23.0 9.1 22.5 41.4 12.2 34.8 30.1 2.0 22.7 FY2008 2997 43.3 147.3 47.7 8.0 33.2 28.1 9.3 37.7 32.7 1.4 17.9 FY2009E 3741 24.8 181.8 23.4 8.2 41.0 22.8 7.1 35.3 33.1 1.2 14.5 FY2010E 4750 27.0 233.8 28.6 8.3 52.7 17.7 5.4 34.6 31.7 0.9 11.6 Abs. Sensex (%) 3m 1yr 3yr (1.8) 17.2 (35.3) (55.0) Titan Indus. (%) (24.8) (39.2) Raghav Sehgal Tel: 022 - 4040 3800 Ext: 309 E-mail: raghav.sehgal@angeltrade.com November 28, 2008 January 30, 2008 For Private Circulation Only - - SebiRegistration No :: INB 010996539 For Private Circulation Only Sebi Registration No INB 58 Angel Broking Service Truly Personalized TM Titan Industries Retail Company Background Leading manufacturer in Jewellery and Watch segment has 85-90% of its stores through Franchisee model Titan Industries was established in 1984 as a JV between the Tata Group and Tamil Nadu Industrial Development Corporation (TNIDC). The company brought about a paradigm shift in the Indian Watch Market, offering quartz technology with international styling. The watches are manufactured at the company's state-of-the-art factory in Hosur, Tamil Nadu. Titan also has manufacturing facilities in Dehradun (North India), Roorkee, Baddi (Himachal Pradesh) and Goa. Drawing from its understanding of the different segments in the Watch market, Titan launched Sonata as a Value Brand targeting those seeking to buy functionally styled watches at affordable prices. Fastrack was launched with youth as its target market. Titan has also ventured into Premium Fashion Watches by acquiring licence for global brands such as Tommy Hilfiger and Hugo Boss. It also has the first Swiss-made watch brand, Xylys, in its portfolio. In 1995, the company ventured into the Jewellery segment under the Tanishq brand to capitalise on the largely fragmented and unbranded market. In 2005, the company launched Gold Plus, its second Jewellery brand targeting the small towns and rural India. Apart from watches and jewellery, the company also has a presence in Fashion Eyewear. It has launched the Fastrack eye gear sunglasses as well as prescription eye wear. From 2003, Titan leveraged its manufacturing competencies and branched into Precision Engineering Products and Machine Building as well. Titan is India's leading manufacturer of Watches and Jewellery, with Titan and Tanishq being the most admired brands in their respective categories. The company operates through the Franchisee Model and currently has 85-90% of its stores operating through Franchisees. Very few outlets are company owned. Franchisees partake 18-22% of overall Revenues, out of which they have to manage rentals, working capital and manpower costs (the Franchisee pays the employees but the Titan management hires them). Manufacturing: Over the years, Titan has established highly integrated manufacturing facilities. The company manufacturers watch movements, watchcases in steel and brass and bracelets in solid and sheet steel. Titan has been recently short-listed by CSIR for funding a key R&D project and has been certified under the ISO 9001 Quality System Standards. Business Mix Watches contribute 30% and 60% to Titan’s Revenues and Profits, respectively Watches: Watches, which are segmented into three categories, viz. Premium, Youth and Mass Market, contribute 30% of Titan's overall Revenues and 60% to its Profits. Titan sells its watches under the World of Titan (WoT) umbrella, which currently has 258 stores with an average store size of 800-1,000 sq.ft. Titan plans to have 300 and 400 stores by FY2009E and FY2011E, respectively. Jewellery partakes 65% of Top-line Jewellery: Jewellery contributes around 65% to Titan's Top-line. Its flagship brand, Tanishq, is India's largest and fastest growing jewellery brand with a premium range of gold jewellery studded with diamonds or coloured gems and a wide range in 22kt pure gold. Platinum jewellery is also a part of its product range. Titan has also forayed into traditional jewellery through its mass market retail stores called Gold Plus. November 2008 January 30,28, 2008 For Private Circulation Only - - SebiRegistration No :: INB 010996539 For Private Circulation Only Sebi Registration No 59 Angel Broking Service Truly Personalized TM Titan Industries Retail Eye wear and Precision Engg. are at nascent stages of growth Eye wear: Titan Eye+ is currently on pilot mode with 10 stores at the end of FY2008. It sells sunglasses under the Fastrack brand. It has prescription eyewear comprising frames, lenses, sunglasses, accessories and contact lenses of in-house and other premium brands. Precision Engineering: Titan's Precision Engineering Division supplies precision components to the Avionics and Automotive Industries. It also manufactures dashboard clocks for the car original equipment manufacturers (OEMs) in Europe and America. The division also provides fully integrated Automation solutions. Exhibit 1: Business Mix (FY2008) Titan Industries Watches (Titan) 30% Others 5% MassSonata Jewellery 65% Premium Titan YouthFastrack Tanishq Gold Plus Eye Care Precision Engineering Fastrack Prescription Eye Wear Source: Company, Angel Research November 28, 2008 January 30, 2008 For Private Circulation Only - - SebiRegistration No :: INB 010996539 For Private Circulation Only Sebi Registration No INB 60 Angel Broking Service Truly Personalized TM Titan Industries Retail Investment Argument Only Organised national player in Watch and Jewellery segment Low penetration levels in Indian Watch market provides huge potential High growth Premium Watch segment to tap tremendous potential in low penetration market The Rs75,000cr (by value) and 4.2cr (by volume) Indian Watch Market is growing at a CAGR of 12% pa. with 6% marketshare in Organised Retail, which provides ample scope for growth for Organised players. Further, in India penetration level of watches is relatively low at only 35 watches per 1,000 people compared to 70-80 person per 1,000 in China and 250 per 1,000 in the US, which bodes well for the Organised Retailers. The Indian Watch market is segregated primarily into three categories - Mass Market, which is growing at around 15% pa; Mid-segment, which is growing at 10-15% pa. and the Premium segment, which is growing at 30% pa. We believe that there exists tremendous growth potential for Titan in terms of first watch purchase or a repeat buy in this under-penetrated market. Indian Jewellery Market - All that shines is actually Gold Branded Jewellery maps Organized Retail in India with 5% market share in Indian Jewellery market Branded jewellery in India accounts for 5% of the Rs75,000cr Indian Jewellery market. In FY2008, Tanishq garnered sales of Rs2,027cr thereby capturing around 54% of the Branded Jewellery market in India. We believe that in the long run, due to the changing demographics, increasing per capita income levels and low penetration of branded jewellery in India, there exists immense potential for Tanishq to grow. We believe that Tanishq has the inherent competitive advantage of being the only national branded jewellery player and of having the first-mover advantage compared to peers. We believe that Tanishq's future growth would not come from increasing marketshare within the Branded jewellery category, but it would have to reach out to more and more consumers with better innovative designs. The unbranded Jewellery market, on the other hand, is highly fragmented comprising many regional and local players operating in the traditional jewellery domain. The company has Gold Plus operating in the traditional Jewellery segment. However, given that the consumer is price sensitive, Revenues from its Jewellery business, in particular traditional jewellery, are expected to be cyclical in nature. Eyewear - New Kid on the block The Eyewear Industry is largely unorganised with a few national/ regional optical chains. Nonetheless, the industry is is expected to grow at a healthy 15% over the next two years, with major national and international players like Reliance, Pearl, etc. eyeing the Indian market. Currently, Titan is the only Organised Watch and Jewellery Retailer with a pan-India presence. At the end of FY2008, Titan had 235 World of Titan, 104 Tanishq stores (in 64 cities),10 Eye+ stores and 22 Gold Plus stores. The company also sells its products through more than 12,000 multi-brand outlets across the globe.Titan has an established brand and legacy of trust that is November 2008 January 30,28, 2008 For Private Circulation Only - - SebiRegistration No :: INB 010996539 For Private Circulation Only Sebi Registration No 61 Angel Broking Service Truly Personalized TM Titan Industries Retail reflected in the fact that Titan Watches has more than 65% marketshare in the Organised Watch segment and 41% marketshare in the Organised Jewellery Retailing segment. Thus, we believe that Titan is the best placed to take advantage of low-penetrated Watches, Jewellery and Eye-care segments compared to some of the relatively new players in the market. Further, when compared to other regional players, Titan also has cost advantages being a dominant national player, which aids it to negotiate hard with its vendors for bulk discounts resulting in lower costs. Touching all price points The Troika of Titan watches Titan touches all price points and market segments to fuel its growth Titan Retails merchandise that touches all price points and has something to offer to all socio-economic classes - from aspirants to affluents and across price points reaching up to around Rs30,000 in the Premium segment to as low as Rs295 in the Mass Market watch segment. The Segment-wise details are as follows: Premium (Titan) - The Premium Segment brand, Titan, is growing at 30% pa. and constitutes around 27% of Total Sales of Watches in FY2008. The Titan brand architecture comprises several sub-brands, each of which is a leader in its segment, notable amongst them being Xylys, Titan Edge, Titan Raga, Nebula and other collections like Wall Street, Heritage, Regalia and the Aviator series. Youth (Fastrack) - Fastrack is focused on exciting, affordable new products in the Watches and Sunglasses segments and has become a favourite among the Indian youth. Mass Market (Sonata) - The brand is focused on the sub-Rs500 price band segment, thereby enhancing affordability of watches for a large section of the population of consumer in the bottom half of the pyramid. The brand also focuses on first-time buyers of watches in the small towns India, since penetration of watches in these markets is still very limited. Sonata is India's largest selling brand in watches and touches all the price points between Rs295 to Rs1,200 suitable for Mass Retailing. Apart from this, the company also markets Tommy Hilfiger watches under a licensing arrangement and is set to introduce Hugo Boss. Jewellery and Eyewear for all Gold Plus to enhance Titan's flagship jewellery brand Tanishq operates in the premium range of 22 karat gold, diamond and platinum jewellery. Tanishq's price range varies from as low as Rs3,000 for pendants to lakhs of rupees depending on the collection and design. Titan also has traditional jewellery offering through its mass market retail stores, Gold Plus.Titan's Fastrack eyewear has a product range of Rs500 to Rs3,000 to suit all segments. Tanishq’s product repertoire November 28, 2008 January 30, 2008 For Private Circulation Only - - SebiRegistration No :: INB 010996539 For Private Circulation Only Sebi Registration No INB 62 Angel Broking Service Truly Personalized TM Titan Industries Retail Exhibit 2: Watch Landscape of Titan v/s Competition Source: Company Easily Scalable Franchisee Model Number of stores and total Retail space is estimated to grow at a CAGR of 30% and 34% till FY2010E respectively, through the Franchisee model Titan operates 85-90% of its stores through Franchisees, which gives its high business scalability. It has refined its business model according to its needs over the years and the Titan brand name ensures a pipeline of Franchisees/ potential Franchisees for its various divisions. We estimate Titan to grow its number of stores and total Retail space at a CAGR of 30% and 34% till FY2010E respectively, through the Franchisee route. WoT, Titan’s flagship store of watches, had around 2,11,500 sq.ft. of Retail space spread across 235 stores at the end of FY2008. We estimate WoT to grow at a CAGR of 16% over FY2008-10E to reach around 2,86,350 sq.ft. spread over 318 stores by FY2010E. Tanishq had around 1,76,800 sq.ft. of retail space spread across 104 stores at the end of FY2008. We estimate Tanishq to post CAGR of 41% over FY2008 -10E to reach 3,52,000 sq.ft. through over 207 stores by FY2010E. Gold Plus had around 24,200 sq.ft. of retail space spread across 22 stores at the end of FY2008. We estimate Gold Plus to grow at a CAGR of around 41% over FY2008-10E to reach 48,200 sq.ft. spread over 44 stores by FY2010E. Eye+ had around 11,000 sq.ft. of retail space spread across 10 stores at the end of FY2008. We estimate Eye+ to grow at a whopping CAGR of 150% over FY2008- 10E to reach 68,750 sq.ft. spread over 68 stores by FY2011. Overall, we estimate Titan’s Retail space to grow at a CAGR of 34% over FY2008-10E to reach 7,55,300 sq.ft. spread across 632 stores in FY2010E from FY2008 levels of 4,23,500 sq.ft. spread across 371 stores. We estimate Titan's Topline to grow at a CAGR of 26% over FY2008-10E on the back of rapid expansion in Retail space owing to its Franchisee model. November 2008 January 30,28, 2008 For Private Circulation Only - - SebiRegistration No :: INB 010996539 For Private Circulation Only Sebi Registration No 63 Angel Broking Service Truly Personalized TM Titan Industries Retail Efficient Gold reserve management 95-96% of Gold requirements hedged through Gold loans Titan has well-defined hedging strategies to hedge its exposure to the fluctuations in gold rate. For instance, it enters into forward contracts supported by underlying transactions, which reduces risks. Bulk of the gold continues to be procured in the form of gold loans from commercial banks, which is a perfect hedging tool besides being cost effective. The company hedges 95-96% of the gold required for its Jewellery business in this manner. Therefore, it is safeguarded from majority of its business risks on account of gold price volatilities. All Titan's gold reserves are essentially gold on lease, which has a considerably lower lending rate of 1.75% than its cost of debt of around 9.5%. So, instead of taking debt to fund its gold requirements, Titan opts for gold on lease and saves 7.75% by way of Interest costs. We believe that the gold on lease system along with efficient hedging against gold price volatility will reduce cost pressures for Titan. It will also save on Interest costs on gold as it is on lease and is a more economical way to get gold and would add to its Bottom-line. Financial Outlook Strong Top-line growth Net Sales to grow at CAGR of 26% over FY2008-2010E to Rs4,750cr During FY2006-08, Titan posted healthy 44% CAGR in Net Sales to Rs2,997cr. The Watch segment that constituted around 30% of the company's Total Sales, grew 17% to Rs917.6cr, while Jewellery contributed 65%, moving by 57% to Rs2,028cr in FY2008. Sales of Other Products including accessories and the Precision Engineering business, increased 53% to Rs96cr in FY2008. Going forward, we expect the company's Net Sales to clock CAGR of 26% over FY2008-10E to Rs4,750cr in FY2010E on account of high growth in the Jewellery segment and Premium Watches, coupled with steady growth in mass market Watches segment and additional Revenues from the under-penetrated Eyewear Division. Exhibit 3: Net Sales Trend (Rs cr) 5,000 4,500 4,000 3,500 3,000 2,500 2,000 1,500 1,000 500 0 Revenue Revenue Growth 4,750 3,741 2,997 2,091 % 50 45 40 35 30 25 20 15 10 5 0 FY2007 Source: Company, Angel Resource FY2008 FY2009E FY2010E November 28, 2008 January 30, 2008 For Private Circulation Only - - SebiRegistration No :: INB 010996539 For Private Circulation Only Sebi Registration No INB 64 Angel Broking Service Truly Personalized TM Titan Industries Retail EBITDA, PAT Margins to remain high EBITDA Margins to expand to 8.3% in FY2010E Titan's EBITDA Margins have improved marginally to 8% in FY2008 from 7.4% in FY2006 owing to improvement in operational efficiency. In absolute terms, Titan's EBITDA grew at a CAGR of 48% over FY2006-08 to Rs240cr. Going ahead, we expect EBITDA to grow at a CAGR of 28% over FY2008-10E to Rs392cr with EBITDA Margins remaining stable at around 8.2% and 8.3%in FY2009E and FY2010E, respectively. Exhibit 4: EBITDA, PAT Margin Trend EBITDA (Rs cr) 450 400 350 300 250 200 150 100 50 0 FY2007 FY2008 FY2009E FY2010E 4.8% 4.9% 4.8% 4.9% 9.1% 8.0% 8.2% 8.3% PAT EBITDA Margin PAT Margin % 10 9 8 7 6 5 4 3 2 1 0 Source: Company, Angel Resource Net Margins to sustain at 4.9% in FY2010E Titan posted CAGR of 34% in Net Profit over FY2006-08 to Rs146cr. But, Net Profit Margins declined to 4.9% levels in FY2008 from a healthy 5.5% in FY2006 due to the sharp increase in Depreciation costs. It may noted here that despite the fall in PAT Margins, Titan still has the highest PAT Margins in industry, and it has sustained its PAT Margins at around 4.8% in FY2007 and FY2008, respectively. Going forward, we expect Titan to clock CAGR of 26% in PAT over FY2008-10E to Rs234cr. We expect PAT Margins to rule flat at 4.8% and 4.9% in FY2009E and FY2010E, respectively. Exhibit 5: Comparative Net PAT Margins % 6.0 5.0 4.0 3.0 2.0 1.0 0.0 FY2007 FY2008 FY2009E FY2010E Titan NPAT Margin VRPL NPAT Margin PRIL NPAT Margin Source: Angel Resource November 2008 January 30,28, 2008 For Private Circulation Only - - SebiRegistration No :: INB 010996539 For Private Circulation Only Sebi Registration No 65 Angel Broking Service Truly Personalized TM Titan Industries Retail Robust Return Ratios Robust Return ratios, low leverage to drive growth for Titan Over the years, Titan has consistently posted robust RoE and RoCE, which has also been the highest in Industry. Titan has consistently delivered RoE of 35% and above, and we estimate it to maintain RoE of 35.3% and 34.6% in FY2009E and FY2010E respectively, as well on account of high Asset-Turnover ratio. Titan has an history of operating at a leverage below 1, which has given it tremendous RoCE. Titan's D/E ratio fell from 0.74x in FY2007 to 0.47x in FY2008, thereby resulting in RoCE spurting to 32.7% in FY2008 from 30.1% in FY2007. We estimate Titan to deliver RoCE of 33.1% and 31.7% in FY2009E and FY2010E, respectively. Exhibit 6: Trend in Return Ratios RoCE RoE % 40.0 35.0 30.1 30.0 25.0 20.0 15.0 10.0 5.0 0.0 FY2007 FY2008 FY2009E FY2010E 34.8 32.7 37.7 33.1 35.3 31.7 34.6 Source: Company, Angel Research November 28, 2008 January 30, 2008 For Private Circulation Only - - SebiRegistration No :: INB 010996539 For Private Circulation Only Sebi Registration No INB 66 Angel Broking Service Truly Personalized TM Titan Industries Retail Concerns Retention of front-end staff - Supply of skilled labour an issue Specialty Retailing marred by lack of skilled workforce Unlike its other Retailing counterparts, Titan's businesses require a highly skilled workforce to man the front-end. A front-end sales person for watches and jewellery should be able to guide customers and make a recommendation based on their needs. Eye-wear, on the other hand, is Specialty Retailing where knowledge and human resources drives the business. Availability of skilled manpower and Optometrists is a big challenge. Due to high front-end attrition rate in Industry, it has become extremely important for Titan to retain the trained front-end talent. Finding right location Since Titan does not open too many Big Box stores and majority of the stores are in the range of 1,000-1,500 sq.ft., it does not go for long-term relationship contracts with the Mall developers. As a result, Titan has limited visibility on the Retail front. Even though the Franchisee model has huge scalability potential, finding a right location with appropriate space and with a right kind of franchisee is a challenging task for Titan. Business Specific Challenges Watches Global Brands to compete with Titan in 42mn Indian Watch Market Competition from global brands: With the advent of as many as 55 global brands in India, competition has only intensified for Titan. Favourable demographics and latent potential are seeing more and more global brands making a beeline to entere the huge 42mn Watch Market of India, which is growing at 12% per annum. Hence, Titan is faced with the challenge of not only maintaining its marketshare but attracting new consumers and capturing repeat or secondary purchases. Counterfeit watches: The grey watches market in India is thriving as high indirect tax on branded watches tilts the balance in their favour. This is expected to hit Titan's price-sensitive mass market brand, Sonata. Jewellery Gold Prices: Gold prices have been on an upswing in FY2008, which has resulted in lower sales growth for Titan. The demand for gold jewellery may get torpid if the gold prices continue to be volatile. Even though Titan has hedged its gold against volatility, it would still be a major challenge for the company to attract consumers to its outlets, especially to its traditional jewellery format, Gold Plus, while the price of gold continues to be on upward trend. Regional players going National: Large Regional players are getting Organised and are planning to enter other markets in India, which poses a threat for Titan. November 2008 January 30,28, 2008 For Private Circulation Only - - SebiRegistration No :: INB 010996539 For Private Circulation Only Sebi Registration No 67 Angel Broking Service Truly Personalized TM Titan Industries Retail Precision Engineering (PE) Precision Engineering essentially caters to the Automotive and Aerospace Sectors and its major customers are based in USA. Effects of the global meltdown, especially on the US economy, would have a cascading effect on PE's business and in turn on Titan's business. Further, inherent economic risks of long-term Rupee appreciation with respect to the US Dollar can result in lower profitability of the PE business. Hence, Titan needs to chalk out its long-term strategy to cut costs and hedge its forex risk. Eye Wear Skilled Optometrics: Titan's Eye-care Division is still at nascent stages of development and growth. Going ahead, the company expects this niche segment to clock high growth. Hiring, training and retaining skilled staff and finding trained Optometrics to keep up with high growth is a big challenge for the company. November 28, 2008 January 30, 2008 For Private Circulation Only - - SebiRegistration No :: INB 010996539 For Private Circulation Only Sebi Registration No INB 68 Angel Broking Service Truly Personalized TM Titan Industries Retail Outlook and Valuation We believe that the niche segments in which Titan Industries operates, viz., Watches, Jewellery and Eyewear have tremendous growth potential. Further, with Titan being an early entrant in all the three segments has the first-mover advantage. The company is well poised to capture substantial share of the Eyewear pie, while maintaining its dominance in the Watches and Jewellery segments. Since Titan's growth is driven by the Franchisee model, we believe execution will not be big risk factor for Titan compared to other Retailiers in the industry. Nonetheless, there exist few concerns associated with the niche segments in which the company operates, biggest of them being availability of skilled front-end manpower. However, we believe that Titan would be able to attract and retain talent due to its brand presence and legacy of the Tata group in India. On the bourses, the stock has consistently outperformed the Sensex over the past two years. Although we are positive on the company's future growth prospects owing to its scalable business model that would deliver robust Return Ratios, we believe that at 17.7x FY2010E Earnings and 5.4x FY2010E P/BV, the stock discounts the same fairly well. On comparative basis also, Titan is richly valued vis-a-vis its peers. Hence, we Initiate Coverage on Titan Industries with a Neutral recommendation. Exhibit 7: One- year Forward P/E Band 2,500 55x 2,000 45x 1,500 35x 25x 15x 1,000 500 0 Jun -07 Jun -08 Jan-07 Jan-08 Jul-08 Aug-07 May-08 Aug-08 Nov-07 Sep-07 Nov-06 Dec-06 Dec-07 Sep-08 Feb-07 Feb-08 Mar-07 Mar-08 Apr-07 Apr-08 Jul-07 May-07 Oct-07 Oct-08 Source: C-Line, Angel Research Nov-08 November 2008 January 30,28, 2008 For Private Circulation Only - - SebiRegistration No :: INB 010996539 For Private Circulation Only Sebi Registration No 69 Angel Broking Service Truly Personalized TM Titan Industries Retail Profit & Loss Statement Y/E March Net Sales % chg Total Expenditure EBIDTA (% of Net Sales) Other Income Depreciation& Amortisation Interest PBT (% of Net Sales) Extraordinary Expense/(Inc.) Tax (% of PBT) PAT % chg Share of Loss in Associate Less: IT of previous years Ad. PAT % chg FY2007 2,091 45.2 1,947 190.7 9.1 6.0 26.0 21.2 149.4 7.0 37.8 25.3 111.6 12.9 (11.6) 0.2 99.8 23.0 FY2008 FY2009E 2,997 43.3 2,811 240.0 8.0 3.4 33.3 20.8 189.2 6.2 44.9 23.7 144.4 29.4 11.0 8.0 147.3 47.7 3,741 24.8 3,506 308.7 8.2 3.4 38.9 34.8 238.3 6.3 56.5 23.7 181.8 26.0 181.8 23.4 Rs crore FY2010E 4,750 27.0 4,447 391.9 8.3 3.4 46.6 42.2 306.5 6.3 72.7 23.7 233.8 28.6 233.8 28.6 Balance Sheet Y/E March SOURCES OF FUNDS Equity Share Capital Reserves& Surplus Shareholders Funds Total Loans Miscelleneous Deferred Tax Liability (net) Total Liabilities APPLICATION OF FUNDS Gross Block Less: Acc. Depreciation Net Block Capital Work-in-Progress Investments Current Assets Current liabilities Miscelleneous Expenditure Net Current Assets Total Assets 525.8 270.5 255.3 16.4 31.6 891.2 595.9 4.24 295.4 602.9 573.1 295.4 277.7 10.0 2.3 1,303.2 913.3 1.29 389.9 681.3 669.8 334.3 335.4 2.3 1,541.6 908.3 633.3 971.1 44.4 292.7 337.1 247.8 18.1 603.0 44.4 401.4 445.8 210.3 25.2 681.3 44.4 541.2 585.6 351.4 2.3 31.8 971.1 FY2007 FY2008 FY2009E Rs crore FY2010E 44.4 723.1 767.5 422.1 2.3 40.9 1,232.8 802.1 380.9 421.1 2.3 1,952.5 1,143.1 809.3 1,232.8 Cash Flow Statement Y/E March Profit before tax Depreciation (Inc)/Dec in Working Capital Interest (Net) Direct taxes paid Other Inc./ (Dec.) in Fixed Assets Free Cash Flow (Inc)/Dec in Investments Others Issue of Equity Inc./(Dec.) in loans Dividend Paid (Incl. Tax) Interest Paid Inc./(Dec.) in Cash Opening Cash balances Exchange loss/ (gain) Closing Cash balances FY2007 149.4 26.0 (5.3) 19.2 37.8 34.2 95.4 60.5 (3.6) 24.4 95.7 (21.6) 26.4 21.2 11.8 38.6 0.6 51.0 FY2008 FY2009E 189.2 33.3 (92.2) 19.7 44.9 (142.4) 106.6 41.0 65.7 29.3 23.7 (37.5) 41.6 20.8 (40.8) 1.2 51.0 2.9 55.1 238.3 38.9 (282.9) 33.4 56.5 3.9 (23.5) 86.6 (110.1) (1.5) 141.1 41.6 34.8 64.8 (43.9) 55.1 11.2 Rs crore FY2010E 306.5 46.6 (178.0) 40.4 72.7 7.3 151.9 132.3 19.6 (1.8) 70.8 51.9 42.2 (23.4) (2.0) 11.2 9.1 Key Ratios Y/E March Per Share Data(Rs) EPS Cash EPS DPS Book Value Operating Ratio (%) Inventory (days) Debtors (days) Creditors (days) Returns (%) RoE RoCE Dividend Payout Valuation Ratio (x) P/E P/E (Cash EPS) P/BV EV / Sales EV / EBITDA 41.4 32.6 12.2 2.0 22.7 28.1 22.9 9.3 1.4 17.9 22.8 18.7 7.1 1.2 14.5 17.7 14.8 5.4 0.9 11.6 34.8 30.1 23 37.7 32.7 24 35.3 33.1 20 34.6 31.7 19 116.0 16.6 92.2 125.1 11.9 100.4 122.4 2.8 79.9 122.4 2.8 79.7 22.5 28.6 5.1 76.6 33.2 40.7 8.0 100.4 41.0 49.7 8.0 131.9 52.7 63.2 10.0 172.9 FY2007 FY2008 FY2009E FY2010E Cash Flow from Operations 155.9 Cash Flow from Financing (24.3) November 28, 2008 January 30, 2008 For Private Circulation Only - - SebiRegistration No :: INB 010996539 For Private Circulation Only Sebi Registration No INB 70 Angel Broking Service Truly Personalized TM Titan Industries Retail This page is intentionally left blank November 2008 January 30,28, 2008 For Private Circulation Only - - SebiRegistration No :: INB 010996539 For Private Circulation Only Sebi Registration No 71 Angel Broking Service Truly Personalized TM Jain Irrigation Vishal Retail Initiating Coverage NEUTRAL Price Target Price Investment Period Rs68 12 Months 'Vishal' plans for the future Vishal Retail (VRPL) is the fastest growing Retail player in India clocking CAGR of around 89% over FY2005-08. It is a niche player with strong focus on the Value Retailing segment catering majorly to consumers in Tier-II and III cities. It is currently present in around 100 cities. The company is set to grow its Top-line and Bottom-line at a CAGR of 40% and 8% respectively, over FY2008-10E. Even though at current levels of Rs68, the stock is trading at very attractive valuations of 3.2x FY2010E Earnings and 0.4x FY2010E P/BV, there are concerns over its high Debt-to-Equity ratio, which is expected to be 2.7x in FY2010. Hence, we Initiate Coverage on the stock, with a Neutral recommendation. Value Retailing - A scalable business: VRPL is a Value Retailer catering primarily to Tier-II and III cities. VRPL enjoys an edge over peers as it has a focused business model operating majorly through Hypermarts, which is easily scalable in India's Top-784 cities. This has enabled VRPL achieve economies of scale for sourcing raw materials and pass on the benefits to consumers. We expect such benefits to increase going ahead as VRPL scales up in size and the value chain to cater to the huge opportunity arising out of expanding its operations in other Tier-II and III cities. Private Labels to drive growth: VRPL earns up to 30% Gross Profit Margins (GPM) in FMCG Private Labels, while GPMs are around 50-52% in Apparels. Going forward, the company is looking at increasing share of the high-Margin Private Labels in its overall product mix to drive growth and maintain high EBIDTA Margins of 12.7% till FY2010E. We estimate Private Label sales to grow at a CAGR of 65% over FY2008-11E to Rs654cr, with the segment contribution increasing from 15% in FY2008 to 25% by FY2011E. We expect VRPL’s Bottom-line to grow on the back of increasing contribution of Private Labels, which would help counter the high interest costs. Less prone to Real Estate cycle: VRPL is less exposed to Real Estate cost fluctuations realty markets are comparatively less volatile in Tier-II and III cities than the Tier-I cities. Hence, VRPL has greater visibility in managing its Real Estate costs with better flexibility in selecting store locations. VRPL has already tied up 1.5mn sq.ft. of space and has identified another 8.5mn sq.ft. of space for its stores. For players in the Retail sector, rent costs and EBITDA Margins are inversely proportionate to EBIDTA, and higher rent costs have a considerably negative impact on a company's EBITDA. Key Financials Y/E March (Rs cr) FY2007 571 108.1 25.1 100.2 11.7 14.0 4.8 1.2 25.1 21.6 0.6 5.7 FY2008 953 66.8 40.7 62.0 12.7 18.2 3.7 0.6 20.4 17.2 0.6 5.2 FY2009E 1,330 39.6 34.4 (15.3) 12.7 15.4 4.4 0.5 11.9 14.6 0.6 5.1 FY2010E 1,868 40.4 47.0 36.6 12.7 21.0 3.2 0.4 14.3 16.2 0.5 4.5 Net Sales % chg Net Profit % chg EBITDA Margin (%) EPS (Rs) P/E (x) P/BV (x) RoE (%) RoCE (%) EV / Sales (x) EV / EBITDA (x) Source: Company, Angel Research Stock Info Sector Market Cap (Rs cr) Beta 52 Week High / Low Avg Daily Volume Face Value (Rs) Retail 151 0.6 1001/56 6772 10 BSE Sensex Nifty 9,093 2,755 BSE Code NSE Code Reuters Code Bloomberg Code 532867 VISHALRET VIRL.BO VISH@IN Shareholding Pattern (%) Promoters MF / Banks / Indian FIs FII / NRIs / OCBs Indian Public / Others 63.9 20.9 9.3 5.9 Abs. Sensex (%) 3m 1yr 3yr (35.3) (55.0) (38.9) Vishal Retail (%) (82.6) (92.9) (91.0) Since listing as on 4th July, 2007 Raghav Sehgal Tel: 022 - 4040 3800 Ext: 309 E-mail: raghav.sehgal@angeltrade.com November 28, 2008 January 30, 2008 For Private Circulation Only - - SebiRegistration No :: INB 010996539 For Private Circulation Only Sebi Registration No INB 72 Angel Broking Service Truly Personalized TM Vishal Retail Retail Company Background VRPL is a North India based Value Retailer with 60% of Revenues in FY2008 coming from Apparels VRPL, which started as a one store enterprise in 1986 in Kolkata, is today a conglomerate with 174 showrooms spread across 103 cities and 23 states. VRPL is a Value Retailer for Apparels, FMCG and Non-FMCG segments. It's Non-FMCG segment comprises products ranging from home furnishings to mobile phones and accessories to footwear to stationary, toys and games. VRPL's outlets cater to almost all price ranges selling over 70,000 products, which meet all household requirements. The showrooms encompassed around 2.93mn sq.ft. in 23 states across India at the end of October 2008. Predominately, a North Indian player, over the years VRPL has expanded to Tier-II and III cities to become a pan-India player. Exhibit 1: Presence across diverse geography FY2007 West 15% East 19% FY2008 West 16% North 62% South 4% East 20% North 60% South 4% Source: Company, Angel Research VRPL has its in-house manufacturing facilities in Manesar and Gurgaon, where it manufactures Private Label apparels, while it outsources manufacture of FMCG and Non-FMCG Private Labels to the local vendors. VRPL currently has eight distribution warehouses adding up to around 1mn sq.ft. of warehousing facilities. It plans to add 16 more warehouses totaling 24 warehouses over the next 2-3 years. The group's philosophy is integration. Towards this, it has backward integrated into high fashion by setting up a state-of-the-art manufacturing facility to support its Retail endeavours. Cost benefits derived from the same would be passed on to the consumers. In terms of Business Mix, at the end of FY2008, 60% of VRPL's Revenues were contributed by Apparels while FMCG and Non-FMCG contributed 20% each to Top-line. Private Label apparels constituted 9% of its FY2008 Revenues. FMCG and Non-FMCG Private Labels contributed 3% each to overall Top-line in FY2008. November 2008 January 30,28, 2008 For Private Circulation Only - - SebiRegistration No :: INB 010996539 For Private Circulation Only Sebi Registration No 73 Angel Broking Service Truly Personalized TM Vishal Retail Retail Exhibit 2: Business Mix (FY2008) Source: Company, Angel Research November 28, 2008 January 30, 2008 For Private Circulation Only - - SebiRegistration No :: INB 010996539 For Private Circulation Only Sebi Registration No INB 74 Angel Broking Service Truly Personalized TM Vishal Retail Retail Investment Argument Value Retailing - Size does matter The 784 cities' opportunity and Value Retailing Huge opportunity for VRPL to expand into Top-784 cities of India Key Retailers and industry experts argue that opportunity for huge Retail growth will come from India's Top-784 cities that constitute around 26% of the population and contribute 35% to Total Retail Sales. VRPL's target segment, the Tier-II and III ciites, account for bulk of it with 18% of the overall population and contributing 22% of its Total Retail sales. VRPL has an inherent competitive advantage over other Retailers as it is already present in 103 of those Top-784 cities. The Value Retailing business model has an intrinsic advantage over Lifestyle Retailing when it comes to expansion. Lifestyle Retailing hits a hurdle when it comes to spending capabilities of Indian consumers. Value Retailing, on the other hand, focuses on the masses and not the classes. Hence, it is able get footprint from the biggest cosmopolitan cities to the smallest of towns. VRPL, being a Value Retailer, with a presence in Tier-II and III cities, it faces lesser cost pressures when it comes to Real Estate and Manpower costs. Hence, it's business model has the potential to expand many times within a span of few years. Tier-II, III cities - VRPL's Mecca VRPL to reach 272 stores by FY2011E from 100 in FY2008 VRPL derives 80% of its Revenues from Tier-II and III cities, where consumers aspire to reach the next level of the consumption pyramid. Hence, with VRPL retailing trendy merchandise at reasonable price points, has emerged with a successful business model for these towns. According to management, VRPL will continue to be a Value Retailer and expand into Tier-II and III cities, which would account for larger proportion of its overall pie. We estimate VRPL's stores to grow at a a CAGR of 39% over FY2008-11E to 272 stores. Exhibit 3: Store Growth Trend till FY2012E Vishal - No. of Stores 400 350 300 250 195 200 150 100 100 50 0 FY2008 FY2009E FY2010E FY2011E 20 0 140 40 60 272 80 Growth % 120 100 Source: Angel Research November 2008 January 30,28, 2008 For Private Circulation Only - - SebiRegistration No :: INB 010996539 For Private Circulation Only Sebi Registration No 75 Angel Broking Service Truly Personalized TM Vishal Retail Retail Exhibit 4: VRPL stores - Tier-wise No. of Stores Tier II & III % 100 90 80 70 60 50 40 30 20 10 0 No. of Stores Tier I 43 78 112 156 6 FY2007 22 FY2008 28 FY2009E 39 FY2010E Source: Company, Angel Research Rapid Expansion We estimate VRPL to grow its Retail space at a CAGR of 41% over FY2008-11E to 6.1mn sq. ft. excluding the Franchisee Retail space VRPL enjoys an edge over peers as it is the only focused Value Retailer in the country and enjoys the cost advantages of rapid expansion. We believe that it will not face difficulty in expanding its business at a rapid pace over the next 3-4 years on account of latent potential of the afore-mentioned 784 cities. VRPL expects to clock five-folds growth in its Retail Space and reach 10mn sq.ft.by FY2011E. However, we believe that even with the ease of scalability and availability of resources, VRPL has set itself an ambitious goal to reach 10mn sq.ft. by FY2011E. VRPL is looking at the Franchisee model to achieve rapid expansion as it would help save funding and inventory carrying costs. Till date, VRPL has tied up 45,000 sq.ft. through the Franchisee model and another 1,00,000 sq.ft. is at the agreement stage. VRPL plans to reach 6,50,000 sq.ft. of Retail space through the Franchisee model by September 2009 . According to our estimates, VRPL will manage around 1.7mn sq.ft. of Retail space through the Franchisee model by FY2011. We estimate VRPL to expand its Retail space at a CAGR of 41% over FY2008-11E to 6.1mn sq.ft. excluding the Franchisee Retail space. This will enable VRPL to reach 7.8mn sq.ft. of Retail space by FY2011E. We believe VRPL will achieve 10mn sq.ft. by FY2012E including the Franchisee Retail space. Exhibit 5: Retail Space Growth Trend Vishal - Retail Space % Growth in Retail Space Mn sq .ft. 8.6 9 71.4% 8 7 6.1 6 45.4% 5 4.4 4 3.1 39.6% 39.6% 39.6% 3 2.2 2 1 0 FY2008 FY2009E FY2010E FY2011E FY2012E Source: Company, Angel Research % 80 70 60 50 40 30 20 10 0 November 28, 2008 January 30, 2008 For Private Circulation Only - - SebiRegistration No :: INB 010996539 For Private Circulation Only Sebi Registration No INB 76 Angel Broking Service Truly Personalized TM Vishal Retail Retail Private Labels - Vishal's White Knights Private labels to drive Profits VRPL to increase share of High-Margin Private Labels from 15% in FY2008 to 25% in FY2011E The Retailing business, especially Value Retailing, is a low-Margin business and Margins are further impacted by low commissions given by the manufacturers. Hence, in a conscious strategy to improve its Gross Margins, VRPL over the years, has evolved a range of Private Labels. This strategy has worked well for the company as it has the highest EBDITA Margins in the Retail Industry.The company registered EBITDA Margins of 11.7% and 12.7% for FY2007 and FY2008, respectively. Exhibit 6: VRPL’s Private Labels Private Label Zeppelin Kitaan Studio Blues & Khakis Paranoia Chlorine Source: Company, Angel Research Category Men's Shirts & Trousers Men's Shirts & Trousers Men's Trousers Men's Shirts & T-Shirts Men's Shirts Private Label Fizzy Babe Jasmine Zero Degree Soil Massa Bay Category Ladies & Kids Girls Ladies & Kids Girls Kids Boys Men's Shirts Men's Trousers & Bermudas VRPL earns up to 30% GPM in FMCG Private Labels, while GPMs are as high as 50-52% in Apparels. Going forward, the company is proposes to increase share of the high-Margin Private Labels in its overall product mix, which would aid maintain high EBIDTA Margins and hence drive growth. We estimate Private Label sales to grow at a CAGR of 74% over FY2008-10E to Rs435cr from Rs143cr in FY2008, with the segment contribution increasing from 15% in FY2008 to 23.3% by FY2010E. Exhibit 7: Private Label sales v/s Total sales Net Sales (Rs cr) Private Label Sales Growth in Sales of Private Label 1,868 % Share of Private Label 2,000 1,800 1,600 1,400 1,200 1,000 800 600 400 200 0 158% 1,330 953 78% 71.3% 15.0% 19.1% 23.3% 180 160 140 120 100 80 60 40 20 0 FY2008 FY2009E FY2010E Source: Company, Angel Research November 2008 January 30,28, 2008 For Private Circulation Only - - SebiRegistration No :: INB 010996539 For Private Circulation Only Sebi Registration No 77 Angel Broking Service Truly Personalized TM Vishal Retail Retail Changing Product Mix - Mantra to Top-line expansion Changes in VRPL’s Product mix to drive growth and reach out to more consumers From being an Apparel Retailer, the company has gradually diversified into other products categories as well. Currently, Apparels constitute a substantial 60% of its overall Sales. Going ahead, VRPL proposes to change its product mix to cater to more consumers across consumption classes includiing FMCG and Non-FMCG segments. VRPL plans to garner 50% of its Revenues from Apparels, 30% from FMCG and 20% from the Non-FMCG by FY2011E. Further, to mitigate the fall in Margins owing to higher contribution of FMCG products, VRPL proposes to increase the share of Private Labels in all categories. Private Labels enjoy higher GPMs of up to 10% compared to other product categories. VRPL plans to increase Revenue contribution of Private Label Apparels to 12%, 7% for FMCG and 6% for Non-FMCG by FY2011. We believe that change in product mix with a focus on increasing the share of Private Labels will provide VRPL flexibility to reduce cost pressures to some extent arising out of high Interest costs. Exhibit 8: Product Mix Product Mix- FY2008 Non-FMCG Other 17% Product Mix - FY2011E Non-FMCG Other 14% Apparels Private Label 12% Non-FMCG Private Label 3% Apparels Private Label 9% Non-FMCG Private Label 6% FMCG Other 16% Apparels Other 52% FMCG Private Labels 3% FMCG Other 23% Apparels Other 38% FMCG Private Labels 7% Source: Company, Angel Research Real Estate Costs - Peers' Envy, Owner's Pride The 'Realty' Competitive Advantage A Tier-II & III cities’ focused Business model gives VRPL a distinct cost advantage over peers The Real Estate cycle in Tier-I cities usually reverses every 3-5 years when realty cools off and rentals are on a decline. Hence, the window of opportunity to expand is too small for Retailers operating in Tier-I cities. On the other hand, Tier-II and III cities are less prone to such realty cycles as prices in these cities remain stable for a longer period of time. We believe that the less volatile nature of realty in Tier-II and III cities will give VRPL an upper hand over other retailers going ahead on account of the following: a. VRPL is able to tie up land at lower prices in these cities. b. It has a much larger window of opportunity to expand since rentals are stable over a longer period of time. November 28, 2008 January 30, 2008 For Private Circulation Only - - SebiRegistration No :: INB 010996539 For Private Circulation Only Sebi Registration No INB 78 Angel Broking Service Truly Personalized TM Vishal Retail Retail The 'Realty' Cost Advantage VRPL enjoys cost advantages over peers, which is evident from the fact that its rent cost is 6.5% of its Retail Sales while it is 8.5% for Shoppers’ Stop and 9.3% for the Future Group (including mall management fees). This saving in Real Estate costs enabled VRPL register 12.7% EBITDA Margin in FY2008 compared to 11.7% in FY2007. For all players operating in the Retail Sector, Rent costs and EBITDA Margins are inversely proportionate to EBIDTA and Rent costs and have a considerable negative impact on a company's EBITDA. We expect VRPL to maintain its cost advantage on account of the low Rentals and its Franchisee model. Exhibit 9: Rent Cost v/s EBITDA Margins % 14.0 13.0 12.0 11.0 10.0 9.0 8.0 7.0 6.0 5.0 4.0 Vishal Pantaloon Shoppers' Stop 6.5% 5.3% FY2008 EBITDA Margin Rent as Percentage of Sales in FY2008 12.7% 9.3% 9.2% 8.5% Source: Company, Angel Research November 2008 January 30,28, 2008 For Private Circulation Only - - SebiRegistration No :: INB 010996539 For Private Circulation Only Sebi Registration No 79 Angel Broking Service Truly Personalized TM Vishal Retail Retail Financial Outlook Net Sales Growth to be driven by Expansion plans Net Sales to grow at a CAGR of 40% over FY2008-2010E VRPL clocked 82% CAGR in Net Sales during FY2006-08 to Rs953cr in FY2008 from Rs288cr in FY2006. Going ahead, we estimate Net Sales to post a CAGR of 40% over FY2008-10E to Rs1,868cr on the back of expansion in Tier-II and III cities. Exhibit 10: Net Sales Growth Trend (Rs cr) 2,000 1,800 1,600 1,400 1,200 1,000 800 600 400 200 0 FY2007 FY2008 FY2009E FY2010 E 0 571 39.6% 40.4% 20 953 40 66.8% 1,330 80 60 108.1% 100 Net Sales Net Sales Growth 1,868 % 120 Source: Company, Angel Research EBITDA Margins to sustain VRPL to sustain EBITDA Margins at 12.7% till FY2010E EBITDA stood at Rs121cr (Rs67cr) in FY2008, up 80% yoy. EBITDA Margins also improved from 11.7% in FY2007 to 12.7% in FY2008. EBITDA Margins came in higher for FY2008 on the back of savings in Operational expenses. In 1HFY2009 too, VRPL has managed to sustain EBITDA Margins at around 12.9% levels and clocked EBITDA of Rs95.4cr as against Rs47.5cr in 1HFY2008. Going forward, we estimate EBITDA to grow at a CAGR of 40% over FY2008-10E to Rs237cr. We estimate VRPL to sustain its EBITDA Margins at 12.7% levels till FY2010E. We believe in the long term, however, EBDITA Margins are unlikely to sustain as more Retailers like Pantaloon expand into Tier-II and III cities, which would exert price and cost pressures on players like VRPL. Exhibit 11: EBITDA Margin Trend (Rs cr) 250 12.7% 200 150 100 50 0 FY2007 FY2008 FY2009E FY2010 E 11.7% 120.9 11.5 67.0 11.0 237.0 168.8 12.0 12.7% 12.7% 12.5 EBITDA EBITDA Margin % 13.0 Source: Company, Angel Research November 28, 2008 January 30, 2008 For Private Circulation Only - - SebiRegistration No :: INB 010996539 For Private Circulation Only Sebi Registration No INB 80 Angel Broking Service Truly Personalized TM Vishal Retail Retail Net Profit to grow at slower pace Net Profit to grow at a slow 8% CAGR over FY2008-10E on account of high interest costs Net Profit stood at Rs40.7cr (Rs25.1cr) in FY2008, up 62% yoy. PAT Margins declined marginally in FY2008 to 4.3% (4.4%). However, going forward, we believe despite healthy Top-line and EBITDA growth, PAT Margins will decline due to rising Interest costs. This is already reflected in the company's 1HFY2009 performance. VRPL's Bottom-line grew by just 23% to Rs18.1cr from Rs14.7cr in 1HFY2008, Despite the robust 102% increase in Top-line. Bottom-line was impacted mainly due to higher Interest costs, which grew 226% in the mentioned period. Going ahead, over FY2008-10E, we expect the company to post a CAGR of 8% in Bottomline to Rs47cr. This is factoring in Interest costs owing to high Debt levels, which would impact PAT Margins, which are estimated at 2.6% and 2.5% in FY2009E and FY2010E, respectively. Exhibit 12: Net Profit Trend (Rs cr) 50 45 40 35 30 25 20 15 10 5 0 FY2007 FY2008 FY2009E FY2010 E 25.1 2.6% 2.5% 40.7 34.4 4.4% PROFIT AFTER TAX Net Profit Margin 47.0 4.3% % 5.0 4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 Source: Company, Angel Research Capex plans to be driven by high Debt We expect VRPL to operate with a leverage of 2.7x till FY2010E to augment growth VRPL currently requires investments to the tune of Rs3,000cr to meet its ambitious target of having 10mn sq.ft. Retail space by FY2011. While around Rs1,100cr would be required to meet VRPL's capex plans, the balance would be take care of its working capital needs. Though management expects to maintain current D/E of 2.1x till FY2010E, we believe that in the current market scenario, it will be difficult for VRPL to raise fresh Equity and would have to rely on debt to fuel growth. We expect VRPL to operate with a leverage of 2.7x till FY2010E to augment growth. We estimate the company to open around 48 new stores by FY2009E and to touch 220 stores by FY2010E. November 2008 January 30,28, 2008 For Private Circulation Only - - SebiRegistration No :: INB 010996539 For Private Circulation Only Sebi Registration No 81 Angel Broking Service Truly Personalized TM Vishal Retail Retail Concerns Ambitious Growth Plans Rs3,000cr of Investments to be met primarily through Debt with the leverage ratio rising to 2.7x by FY2010E VRPL's ambitious growth plans entail substantial investments to the tune of Rs3,000cr. At the end of FY2008, the company’s D/E level stood around 2.0x, which is expected to increase to 2.7x by FY2010E. This would mean availing high Debt at significantly higher Interest costs that would exert pressure on the company's Bottom-line. We believe to mitigate the same, the company would have to take to recourse to Equity funding. However, at current price levels, it would lead to considerable equity dilution that would exert pressure on future EPS. We estimate VRPL's D/E levels to increase to 2.7x in FY2009E and FY2010E from FY2008 levels of 2.0x on account of higher Debt requirements to fund its expansion plans. Exhibit 13: Gearing Ratio (x) Debt - to - Equity Ratio 2.9 2.7 2.5 2.3 2.1 1.9 1.7 1.5 FY2007 Source: Company, Angel Research 2.7 2.7 1.9 2.0 FY2008 FY2009E FY2010E High Inventory Days VRPL tops the Inventory days’ charts among peers with 200 days of Inventory VRPL's inventory has increased seven-folds over the past two years whereas its Retail sales have increased by a mere 3.5x in the same duration. This has led to higher number of inventory days and high carrying costs for VRPL. We believe that the increase in Inventory was primarily due to the 167% spike in Finished Goods in FY2008 due to the expected high pace of store rollouts. The 58% Net Sales growth could not absorb the Finished Goods Inventory in FY2008. In FY2008, VRPL had inventory of 200 days or 29 weeks leading to Inventory of Rs2,800 per sq. ft. This is high compared to Rs1,061 per sq.ft. for Shoppers' Stop and Rs1,723 for Pantaloon. Exhibit 14: Inventory per sq.ft. (Rs, FY2008) 2,800 1,723 1,061 Shoppers' Stop Source: Company, Angel Research November 28, 2008 January 30, 2008 Pantaloons Vishal For Private Circulation Only - - SebiRegistration No :: INB 010996539 For Private Circulation Only Sebi Registration No INB 82 Angel Broking Service Truly Personalized TM Vishal Retail Retail Outlook and Valuation VRPL is an established player in the Retail segment and has emerged as one of the prime Value Retailers in the country. Though earlier confined to the Northern region, the company has slowly but steadily spread its reach to other cities of the country and is now a pan-India player. VRPL has the capability to grow at high pace but requires constant infusion of capital (through Debt and Equity) to fund its Working Capital requirements. The company also requires funds to support its ambitious five-fold expansion plans to be completed by FY2011E. The VRPL stock has got battered on the bourses significantly over the last couple of quarters. Even though at current levels of Rs68, the stock is trading at very attractive valuations of 3.2x FY2010E Earnings and 0.4x FY2010E P/BV, there are concerns over its high Debt-to-Equity ratio, which is expected to be 2.7x in FY2010E. However, in the future, if VRPL is able to raise Equity, we would re-visit the stock. We Initiate Coverage on the stock with a Neutral recommendation. Exhibit 15: 1- year Forward P/E Band 1,200 1,000 55x 800 45x 600 35x 400 25x 15x 200 5x 0 Jul-07 Aug-07 Sep-07 Oct-07 Nov-07 Dec-07 Jan-08 Mar-08 Apr-08 May-08 Jun-08 Jul-08 Aug-08 Sep-08 Oct-08 Nov-08 Source: Company, Angel Research November 2008 January 30,28, 2008 For Private Circulation Only - - SebiRegistration No :: INB 010996539 For Private Circulation Only Sebi Registration No 83 Angel Broking Service Truly Personalized TM Vishal Retail Retail Profit & Loss Statement Y/E March Net Sales % chg Total Exp. excl. Int. & Dep. EBITDA (% of Net Sales) Other Income Depreciation & Amortisation Interest PBT (% of Net Sales) Extraordinary Expense/(Inc.) Tax (% of PBT) PAT % chg Share of Loss in Associate Adj. PAT % chg FY2007 571 108.1 504 67.0 11.7 2.4 15.3 14.8 39.4 6.9 14.3 36.3 25.1 100.2 25.1 100.2 FY2008 FY2009E 953 66.8 832 120.9 12.7 7.8 27.6 37.9 63.2 6.6 22.5 35.7 40.7 62.0 40.7 62.0 1,330 39.6 1,161 168.8 12.7 7.8 36.0 87.5 53.0 4.0 18.5 35.0 34.4 (15.3) 34.4 (15.3) Rs crore FY2010E 1,868 40.4 1,631 237.0 12.7 7.8 49.7 122.6 72.4 3.9 25.3 35.0 47.0 36.6 47.0 36.6 Balance Sheet Y/E March SOURCES OF FUNDS Equity Share Capital Reserves& Surplus Shareholders Funds Total Loans Minority Interest Deferred Tax Liability (net) Total Liabilities APPLICATION OF FUNDS Gross Block Less: Acc. Depreciation Net Block Capital Work-in-Progress Investments Current Assets Current liabilities Net Current Assets Total Assets 132.9 25.6 107.3 1.2 330.6 67.2 263.4 371.9 262.3 53.2 209.1 20.5 733.4 156.7 576.7 806.3 360.5 89.4 271.1 1,028.2 178.3 849.9 1,121.0 18.3 108.6 126.9 243.2 1.8 371.9 22.4 248.9 271.3 532.8 2.2 806.3 22.4 283.4 305.8 813.3 1.8 1,121.0 FY2007 FY2008 FY2009E Rs crore FY2010E 22.4 330.4 352.8 938.5 2.5 1,293.8 497.4 139.2 358.3 1,153.1 217.6 935.5 1,293.8 Cash Flow Statement Y/E March Profit before tax Depreciation Interest (Net) Direct taxes paid Other Current Assets (Incr)/ Decr in Fixed Assets Free Cash Flow (Inc)/Dec in Investments Others Issue of Equity Inc./(Dec.) in loans Dividend Paid (Incl. Tax) Interest Paid Inc./(Dec.) in Cash Opening Cash balances Closing Cash balances FY2007 39.4 15.3 (12.8) 13.8 37.0 (83.4) (185.8) (11.8) 29.0 188.2 (12.6) 6.9 8.3 15.2 FY2008 FY2009E 63.2 27.6 (273.5) 37.9 22.2 (30.7) (197.6) (148.8) (346.4) 35.1 103.8 289.6 37.9 355.5 44.2 10.8 55.0 53.0 36.0 (224.5) 87.5 18.2 (0.5) (66.7) (77.7) (144.3) 280.5 87.5 193.0 48.7 55.0 103.7 Rs crore FY2010E 72.4 49.7 (164.0) 122.6 24.9 0.2 56.1 (137.0) (80.8) (0.0) 125.1 122.6 2.5 (78.3) 103.7 25.4 Key Ratios Y/E March Per Share Data(Rs) EPS Cash EPS DPS Book Value Operating Ratio Inventory (days) Debtors (days) Creditors (days) Returns (%) RoE RoCE Dividend Payout Valuation Ratio (x) P/E P/E (Cash EPS) P/BV EV / Sales EV / EBITDA 4.8 3.7 1.2 0.6 5.7 3.7 2.2 0.6 0.6 5.2 4.4 2.1 0.5 0.6 5.1 3.2 1.6 0.4 0.5 4.5 25.1 21.6 0 20.4 17.2 0 11.9 14.6 0 14.3 16.2 0 150.9 28.3 202.4 41.3 174.8 35.2 172.4 32.3 14.0 18.0 56.7 18.2 30.5 121.1 15.4 31.5 136.5 21.0 43.2 157.5 FY2007 FY2008 FY2009E FY2010E (Inc)/Dec in Working Capital (167.6) Cash Flow from Operations (102.4) Cash Flow from Financing 204.5 November 28, 2008 January 30, 2008 For Private Circulation Only - - SebiRegistration No :: INB 010996539 For Private Circulation Only Sebi Registration No INB 84 Angel Broking Service Truly Personalized TM Vishal Retail Retail This page is intentionally left blank November 2008 January 30,28, 2008 For Private Circulation Only - - SebiRegistration No :: INB 010996539 For Private Circulation Only Sebi Registration No 85 Angel Broking Service Truly Personalized TM Industry Overview Shoppers’ Stop Retail NOT RATED Price Target Price Investment Period Rs175 - Shoppers’ Stop - Lifestyle Retailing Pioneer Shoppers' Stop Limited (SSL) is India's leading Departmental Store and has been one of the pioneers of Organised Retail in India. Over the years, the company has forayed into various formats of Specialty Retail like Cosmetic, Mother Care, Airport Retailing, Food Retailing, Home Solutions, Entertainment and Gaming, etc. and Hypermart format of HyperCity. As on FY2008, SSL had 24 Shoppers' Stop stores, 3 Home Stop stores, 18 Mother Care stores including 9 shop in shops, 5 MAC and Clinique stores, 25 F&B outlets Retail 610 0.2 629/141 3479 10 Stock Info Sector Market Cap (Rs cr) Beta 52 Week High / Low Avg Daily Volume Face Value (Rs) including 13 shop in shops, 2 Airport stores, 48 Crossword stores and 2 Arcelia stores covering a total of about 1.6mn sq.ft. of Retail space. Pioneers of Modern Retail in India: SSL is a pioneer in Organised Retail and the concept of Departmental Stores in India. Over the years, it has established itself as a high-end brand Retailer operating over 131 stores in 12 cities of India. It has become the destination store in the Lifestyle segment for the Middle and Upper class society in India and perhaps is the only player operating in bridge to the Luxury segment. SSL, by virtue of filling up this void, is expected to grow this segment and benefit from it. BSE Sensex Nifty 9,093 2,755 Loyal First Citizens of SSL: SSL has a very loyal and captive customer base by way of its First Citizen Club that contributed around 61% to its Sales in FY2007 and 65% in FY2008. This indicates consumer confidence in the company and ensures steady growth in Revenues through repeat purchases and word-of-mouth publicity. At the end of FY2008, First Citizen Club had a customer base of more than one million, up 28% from 7,82,000 in FY2007. Revenue per First Citizen increased from Rs636 in FY2007 to Rs714 in FY2008 indicating the impact that First Citizens have on SSL's Topline. Strong Same Store Sales (SSS) and Sales per sq.ft. growth: SSL clocked strong SSS growth of 20% and Sales per sq.ft. growth of 9% in FY2008. This growth was led by an increase in First Citizen membership by 28%, customer entry by 5%, average transaction by 11% and rise in average Selling price by 7% on like-to-like store basis. BSE Code NSE Code Reuters Code Bloomberg Code 532638 SHOPERSTOP SHOP@IN Shareholding Pattern (%) Promoters MF / Banks / Indian FIs FII / NRIs / OCBs Indian Public / Others 66.1 13.5 14.4 6.0 Key Financials (Consolidated) Y/E March (Rs. cr) Net Sales % chg Adj. Net Profit % chg EBITDA Margin (%) EPS (Rs) P/E (x) P/BV (x) RoE (%) RoCE (%) EV / Sales (x) EV/EBITDA Source: Company, Angel Research FY2005 539.8 27 18.9 60 6.4 6.8 27.5 5.6 23.0 9.0 1.4 21.5 FY2006 724.4 34 24.3 29 6.7 6.7 27.8 2.4 13.7 12.5 0.8 12.3 FY2007 928.3 28 24.6 1 7.3 6.7 27.7 2.3 9.0 10.6 0.7 10.0 FY2008 1220.6 31 2.7 (89) 4.5 0.5 373.0 2.3 0.9 0.3 0.7 15.3 Abs. Sensex (%) 3m 1yr 3yr (1.8) (35.3) (55.0) Shopper Stop (%)(42.6) (68.4) (59.7) Raghav Sehgal Tel: 022 - 4040 3800 Ext: 309 E-mail: raghav.sehgal@angeltrade.com November 28, 2008 January 30, 2008 For Private Circulation Only - - SebiRegistration No :: INB 010996539 For Private Circulation Only Sebi Registration No INB 86 Angel Broking Service Truly Personalized TM Industry Overview Koutons Retail Retail NOT RATED Price Target Price Investment Period Rs560 - Koutons Retail - High on Discounts Koutons is one of India's fastest growing Apparel Manufacturer and Retailer that retails its products under the brand names 'Koutons' and 'Charlie Outlaw'. Koutons grew its Topline and Bottomline at a scorching 97% yoy during FY2008 with Net Sales touching Rs793.5cr and Net Profit Rs67.1cr. In FY2008, Koutons was operating through 1,175 exclusive Koutons and Charlie Outlaw stores across India making it the largest Retailer in India in terms of number of stores. Retail Stock Info Sector Market Cap (Rs cr) Beta 52 Week High / Low Avg Daily Volume Face Value (Rs) Rapid expansion drives growth: Koutons' Topline and Bottom-line grew at a robust 1,710 0.4 1098/519 8861 10 CAGR of 101% and 222% over FY2005-08 on the back of rapid expansion of its Retail space. Koutons has expanded its Retail space by around 19x since inception to reach 0.88mn sq.ft. at the end of FY2008 riding high on its Franchisee model-based business. At the end of FY2008, the "Koutons" brand was sold on a Total floor area of approximately 0.56mn sq.ft. while the Charlie Outlaw brand was sold on a Total floor area of approximately 0.32mn sq.ft. through 1,175 Retail outlets. Vertical Integration aids cost saving: At the end of FY2008, Koutons had 19 BSE Sensex Nifty 9,093 2,755 in-house Manufacturing/Finishing units and 13 Warehouses spread across various locations in and around Gurgaon, Haryana. This has resulted in significant cost saving and superior EBITDA Margins compared to peers. Koutons increased its annual Finishing and Manufacturing capacity from 3mn and 0.6mn pieces of Apparels in FY2005 to 25mn and 14mn pieces by FY2008. Focus on high-growth Categories: Koutons is focused at providing Menswear to the Middle to High fashion growth categories. The company is also entering the Children and Ladies wear categories. While the Koutons brand is focused on the 22 - 45 age bracket, the Charlie Outlaw brand is positioned to cater to the 14 - 25 year olds. Koutons Junior will target Children. The Women's Apparel line would be introduced under Les Femme brand. BSE Code NSE Code Reuters Code Bloomberg Code 532901 KOUTONS KRIL.BO KUTN@IN Shareholding Pattern (%) Promoters MF / Banks / Indian FIs FII / NRIs / OCBs Indian Public / Others 66.6 8.8 21.8 2.8 Key Financials Y/E March (Rs. cr) Net Sales % chg Adj. Net Profit % chg EBITDA Margin (%) EPS (Rs) P/E (x) P/BV (x) RoE (%) RoCE (%) EV / Sales (x) EV/EBITDA (x) Source: Company, Angel Research FY2005 96.3 177 1.93 114 5.0 4.1 137.6 259.1 36.4 23.2 1.0 357.8 FY2006 158.3 64 13.6 605 16.1 27.3 20.5 82.8 100.0 51.0 1.0 69.2 FY2007 402.4 154 34.1 150 17.1 12.4 45.1 10.5 36.9 30.4 1.11 27.6 FY2008 793.5 97 67.1 97 19.2 22.3 25.1 4.9 26.6 25.7 1.2 13.9 Abs. Sensex (%) 3m 1yr 3yr* (35.3) (55.0) (50.6) (5.2) Koutons (%) (30.5) (39.4) *Since listing as on 12th, Oct. 2007 Raghav Sehgal Tel: 022 - 4040 3800 Ext: 309 E-mail: raghav.sehgal@angeltrade.com November 2008 January 30,28, 2008 For Private Circulation Only - - SebiRegistration No :: INB 010996539 For Private Circulation Only Sebi Registration No 87 Angel Broking Service Truly Personalized TM Aditya Birla Retail Vishal Retail Aditya Birla Retail - ‘More’ yet to come Not Listed A part of the US $24bn Aditya Birla Group, Aditya Birla Retail (ABRL) commenced operations with the acquisition of the South-based Retail chain, Trinethra, for Rs1.5bn in 2006. ABRL operates in the Supermarket and Hypermarket formats and is currently amongst the Top-most Value Retailer in India. Amongst Top-2 Retailers in F&G segment: ABRL is considered to be amongst the Top-2 players in the Food and Grocery segment in India operating through More, its Supermarket format and More Megastore, its Hypermarket format. We believe this is commendable performance by ABRL despite being a late entrant in the Retail Sector. Touching major Consumption points: ABRL's USP is that it operates in Value Retailing Segment, touching all the major consumption points of F&G, Apparels, Consumer Durables, etc. More Supermarkets focus on fresh Fruits and Vegetables, Groceries, Personal care, Home care, General merchandise and a basic range of Apparels while More Megastores focus on being a one-stop shopping destination for the entire family. Besides a large range of products across Fruits and Vegetables, Groceries, FMCG products, the Hypermarkets also have a strong emphasis on General Merchandise, Apparels, Consumer Durables. Currently, ABRL has two Hypermarkets operating in Mysore and Vadodara. Farm-to-Folk Supply Chain: As part of its sourcing strategy, the company has set up a sourcing centre for fresh Farm products such as Fruits and Vegetables and has established direct linkages with the farmers and suppliers. The chain also covers categories such as Groceries, Processed Foods, Bakery products and Personal care products through its Private Labels- More and Select. It has also tied up with Apollo Hospitals to set up Pharmacies within its Supermarkets. Rapid Expansion to fuel growth: ABRL has been aggressive in its expansion plans both organically as well as through in-organic route. Since its acquisition of Trinethra, ABRL has expanded from 170 Trinethra stores to 600 More Supermarkets. Going forward, ABRL plans to have 1,000-1,500 Supermarkets and 100 Hypermarkets under the More brand across the country by the end of 2013 at an investment of Rs8,000-10,000cr. November 28, 2008 January 30, 2008 For Private Circulation Only - - SebiRegistration No :: INB 010996539 For Private Circulation Only Sebi Registration No INB 88 Angel Broking Service Truly Personalized TM Reliance Retail Vishal Retail Reliance Retail - ‘Fresh’ Retailing Not Listed Reliance Retail (RRL) is a Reliance Industries' initiative in the Retail. RIL marked its foray into the Indian Organised Retail with the launch of 'Reliance Fresh' at Hyderabad in October 2006. RRL operates formats such as Hypermarkets, Supermarkets and Convenience stores, along with Specialty Stores in Apparels, Consumer Durables, Wellness and Healthcare, Footwear and Jewellery. Presence across categories in various Formats: RRL, like PRIL, touches all consumption and price points of the Indian consumers through its various Value and Lifestyle Retailing formats. RRL is present in Value Retailing through Reliance Fresh in the F&G segment, which retails fresh fruits, vegetables and dairy products. At the end of FY2008, RRL had an estimated 1,500 Reliance Fresh stores. RRL's Hypermarket Reliance Mart retails a wide array of product categories from F&G to Consumer Durables to Footwear, apart from Private Labels like Reliance Select, Reliance Dairy Pure and First Class, to name a few. RRL has ambitious plans to open around 500 Reliance Mart stores by the end of 2010. Reliance Footprint is RRL's specialty Value Retailing format, which retails footwear out of an average size of 10,000 per sq.ft. store. Reliance Footprint has several Private Labels including Viviana, Tosca, Mancini and Hi-Attitude, to name a few. In the Lifestyle segment, RRL is in present in Consumer Durables, Apparel, Wellness, Jewellery and Home improvement categories through Reliance Digital, Reliance Trendz, Reliance Wellness, Reliance Jewels and Reliance Home, respectively. Vertically Integrated back-end operations: RRL has developed a cost-efficient Farm-to-Fork Supply Chain network through backward integration. This format has eliminated middlemen in the distribution process thereby passing on savings thereof to farmers and end consumers. Currently, RRL sources fruits from Himachal Pradesh, sugar from Andhra Pradesh and Maharashtra and potatoes from Uttar Pradesh and Bihar. RRL also plans to source goods from countries such as China to buy value for money products at low cost. In the Consumer Durable segment, the company is sourcing products from domestic players, apart from signing deals with some Chinese players. RRL is launching captive cargo services by entering into a sales and buyback agreement of a '50 cargo aircraft' order with Boeing. This will facilitate transportation of fruits, flowers and perishables to the company warehouses. Hub and Spoke model for efficient distribution: RRL plans to establish State Agri-distribution hubs that will act as collection centres in the respective States, routing the bulk produce to the Central distribution hub in its SEZs, from where it can be exported as well as dispatched to the various Retail outlets across the country. RRL also plans to set up a 1,600 farm supply hubs across the country that will facilitate purchase of farm produce and sale and provision of farm supplies such as fertilisers, seeds, fuel and credit to farmers. November 2008 January 30,28, 2008 For Private Circulation Only - - SebiRegistration No :: INB 010996539 For Private Circulation Only Sebi Registration No 89 Angel Broking Service Truly Personalized TM RPG Spencer’s Vishal Retail Retail RPG Enterprises - Unique mix of Value and Lifestyle Not Listed RPG Enterprises has business interests in Retail, Technology, Entertainment, Power and Transmission, Tyres and Life Sciences. It entered the Retail Sector in 1996 by setting up Food World Supermarkets in JV with Dairy Farm International prior to the FDI restrictions levied in India. In 1996-97, it commenced Retailing of Music, Health and Beauty products through its chain stores, Music World and Health & Glow, respectively. In 2001, it commenced the Hypermarket business with the 'Giant' fascia. Spencer's had Retail footage of over 2mn sq.ft. and over 400 stores in 65 cities at the beginning of 2008. Unique Portfolio of formats: Spencer's operates in a unique Retail space that is a combination of mass market Value Retailing and very niche Lifestyle Retailing. Spencer's Value: Spencer's is perhaps the only Value Retailer operating primarily in the F&G business through its Spencer's Express & Daily Formats. Spencer's Express is the convenience store format of Spencer's, retailing fresh Farm and Dairy products. Spencer's Daily is in the small store format retailing a range of products to meet daily household needs of the consumers. RPG plans to have around 600 stores in the combined Express and Daily format by the end of 2008. RPG also operates one of the largest Supermarket chains in the F&G segment in India's, Spencer's Super, which retails Fresh produce, Dairy-bakery products, FMCG, Home care and Personal products and Frozen Foods. The Hypermart format of RPG, Spencer's Hyper retails a much wider and deeper product basket than Spencer's Super. RPG plans to have 60 Spencer's Hyper stores by the end of 2010. Spencer's Lifestyle: Spencer's operates in the Lifestyle segment with limited niche product categories of Music and Books through Music World and Books & Beyond, respectively. Music World started operations in November 1997 by taking over Saregama and retails Audio CDs and Cassettes, VCDs and DVDs, CD-ROMs, etc. apart from high-end 'Personal Audio' gadgets such as Apple iPods, Neo Pods and MP3 players. RPG retails Books, Toys, Gifts and Stationery, along with Music and Home videos through its niche Books & Beyond format. Ambitious Future plans: The RPG group plans to invest Rs35bn in its upcoming Retail projects. It had expected to partially fund this investment through the Primary market by FY2009. However, we believe that in the current market situation, this seems next to impossible in the near future. Nevertheless, we do believe that RPG is unlikely to halt its growth trajectory, and according to Crisil is expected to have 3.5mn sq.ft. of Retail space by 2008. RPG also plans to foray into the Apparel segment by launching exclusive Garment Retail stores by mid-2008. Financial Performance - Spencer's (2007) Total Sales (Rs cr) No. of Outlets (inclusive of Spencer's & Books Beyond) Retail Space (mn sq.ft.) Employees Source: Crisil, Angel Research 438 400 1.6 4,500 November 28, 2008 January 30, 2008 For Private Circulation Only - - SebiRegistration No :: INB 010996539 For Private Circulation Only Sebi Registration No INB 90 Angel Broking Service Truly Personalized TM Vishal Retail Subhiksha Retail Subhiksha Trading Services - Small-Box Retailer Not Listed Chennai-based Subhiksha Trading Services, a private limited company, that started operations in 1997, runs a chain of Supermarkets-cum-Pharmacies called 'Subhiksha'. It primarily targets the Middle and Lower income population. Initially, its operations were confined to South India, particularly Tamil Nadu but now Subhiksha has expanded to other parts of the country as well. The company's Turnover increased from Rs12cr in 1997-98 to Rs800cr in 2006-07 owing to rapid expansion and it had 1,050 stores by the end of FY2007. True Value Retailer: Subhiksha is a true Value Retailer that operates only in select categories of F&G, Pharmacy, FMCG and Telecom through its small-box formats. Subhiksha operates on the philosophy of Every Day Low Price (EDLP) and offers 8-10% discount. The company follows the bulk sourcing strategy coupled with low operating costs so that it is well placed to offer discounts. Subhiksha is experimenting with new formats like Subhikhsa Mandi that vends only fruits and vegetables. The recently launched Subhiksha Mobile offers low prices on branded mobile phones. High paced growth: Subhiksha has ramped up its stores at a whopping CAGR of 165% over FY2005-07 to touch 1,050 stores. We believe that Subhiksha, being a small-box Value Retailer, will be able to expand at a faster clip than peers in the Retail Sector. Going forward, Subhiksha plans to open 400 more stores in Chandigarh, Punjab, Madhya Pradesh, Uttar Pradesh, Haryana and West Bengal at an investment of Rs2bn. Exhibit 1: Store Growth Trend Number of Stores 1,200 1,000 800 600 400 200 0 2000 2001 2002 2003 2004 2005 2006 2007 Source: Crisil, Angel Research Store Growth Trend 1050 800 50 83 112 127 142 150 Contract Farming aids cost saving: Subhiksha cuts costs in Supply Chain by directly tying up with farmers to purchase their produce at current price levels under a preferred buying arrangement. The company has set up a centralised processing unit (CPU) at Nashik, as it sources 50% of fruits and vegetables under contract farming to meet the requirement of all its stores November 2008 January 30,28, 2008 For Private Circulation Only - - SebiRegistration No :: INB 010996539 For Private Circulation Only Sebi Registration No 91 Angel Broking Service Truly Personalized TM Vishal Retail Retail Fund Management & Investment Advisory P. Phani Sekhar Siddharth Bhamre Devang Mehta Research Team Hitesh Agrawal Sarabjit Kour Nangra Vaishali Jajoo Harit Shah Deepak Pareek Pawan Burde Vaibhav Agrawal Girish Solanki Shailesh Kanani Anand Shah Puneet Bambha Raghav Sehgal Jaydeep Mavani Amit Vora Richa Chandak Aniruddha Mate Shweta Boob V Srinivasan Amit Bagaria Neha Idnany Sandeep Wagle Ajit Joshi Brijesh Ail Prasad Kushe Vaishnavi Jagtap Milan Sanghvi Mileen Vasudeo Krunal Dayma Commodities Research Team Amar Singh Samson P Anuj Gupta Girish Patki Commodities Research Team (Fundamentals) Badruddin Mandar Pote Bharathi Shetty Bharat Patil ( 022 - 4040 3800 / 2835 9600) phani.sekhar@angeltrade.com siddarth.bhamre@angeltrade.com devang.mehta@angeltrade.com hitesh.agrawal@angeltrade.com sarabjit@angeltrade.com vaishali.jajoo@angeltrade.com harit.shah@angeltrade.com deepak.pareek@angeltrade.com pawan.burde@angeltrade.com vaibhav.agrawal@angeltrade.com girish.solanki@angeltrade.com shailesh.kanani@angeltrade.com anand.shah@angeltrade.com puneet.bambha@angeltrade.com raghav.sehgal@angeltrade.com jaydeep.mavani@angeltrade.com amit.vora@angeltrade.com richa.chandak@angeltrade.com aniruddha.mate@angeltrade.com shweta.boob@angeltrade.com v.srinivasan@angeltrade.com amit.bagaria@angeltrade.com neha.idnany@angeltrade.com sandeep@angeltrade.com ajit.joshi@angeltrade.com brijesh@angeltrade.com prasad.kushe@angeltrade.com vaishnavi.jagtap@angeltrade.com milan.sanghvi@angeltrade.com vasudeo.kamalakant@angeltrade.com krunal.dayma@angeltrade.com amar.singh@angeltrade.com samsonp@angeltrade.com anuj.gupta@angeltrade.com girish.patki@angeltrade.com badruddin@angeltrade.com mandar.pote@angeltrade.com bharathi.shetty@angeltrade.com bharat.patil@angeltrade.com Fund Manager - (PMS) Head - Investment Advisory AVP - Investment Advisory ( 022 - 4040 3800 / 2835 9600) Head - Research VP-Research, Pharmaceutical Automobile IT, Telecom Oil & Gas Metals & Mining, Cement Banking Power, Mid-cap Infrastructure, Real Estate FMCG , Media Capital Goods, Engineering Retail Research Associate (Automobile) Research Associate (Oil & Gas) Research Associate (Banking) Research Associate (Infra, Real Estate) Research Associate (FMCG , Media) Research Associate (Power, Mid-cap) PMS Research Associate - (PMS) Chief Technical Analyst AVP Technical Advisory Services Manager - Technical Advisory Services Sr.Technical Analyst Sr. Technical Analyst Sr. Technical Analyst Technical Advisor (TAS) Derivative Analyst Research Head (Commodities) Sr. Technical Analyst Sr. Technical Analyst Sr. Technical Analyst Sr. Research Analyst (Agri) Research Analyst (Energy) Research Editor Production Research & Investment Advisory: Acme Plaza, 3rd Floor ‘A’ wing, M.V. 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Ratings (Returns) : Buy (Upside > 15%) Reduce (Downside upto 15%) Accumulate (Upside upto 15%) Sell (Downside > 15%) Neutral (5 to -5%) November 28, 2008 January 30, 2008 For Private Circulation Only - - SebiRegistration No :: INB 010996539 For Private Circulation Only Sebi Registration No INB 92