April 06, 2009 | Retail

RESULT PREVIEW √ Retail

ANALYSTS
Tough times continue… Bharat Chhoda
bharat.chhoda@icicidirect.com
We expect our coverage universe of retail companies to report 14.34% YoY Prerna Jhunjhunwala
revenue growth due to the expansion undertaken in the first three quarters prerna.jhunjhunwala@icicidirect.com
of FY09. The EBITDA margin is expected to improve marginally by 30 bps Rahul Malhotra
due to the cost rationalisation measures undertaken by the companies. The rahul.malhotra@icicidirect.com
net profit is expected to decline by 13.2% due to slowing sales and higher
debt taken for working capital requirements.

Highlights of the quarter

During the quarter, retailers offered huge discounts to lure consumers to
the stores and convert them into sales. Almost all the retailers announced a
slowing of their expansion plans. They are in the process of closing their Price performance (%)
unviable stores and are resizing the existing large stores to make them 1M 3M 6M 12M
profitable. They have also announced cost cutting strategies involving Koutons 15.84 -12.10 -33.74 -42.29
centralising of operations and renegotiating rentals with the mall Vishal 23.31 -63.87 -84.96 -95.11
developers. Franchise agreement was the most preferred route preferred by
majority retailers due to the asset-light model nature of business.

Broad sectoral outlook for Q3FY09E

The retail sector is facing a tough time due to changing consumer
behaviour. In the challenging macroeconomic scenario, consumers are
prioritising their requirements and savings are at the top of the list.
Discretionary spends are being postponed to the future and only basic
necessities are getting converted to purchases. Footfalls have been lower
and the conversion rate has been higher due to purchase of basic
necessities. The heavy discounts offered to lure customers to stores are
expected to put pressure on operating margins. However, this pressure is
expected to ease due to the cost cutting initiative taken by the retailers.
The high debt to equity ratio remains a key concern for all retailers as
profitability is also under pressure.
India continues to be among the top retail destinations in the world.
Value retail remains the preferred format for Indian consumers. We
believe the investments in the sector will continue in the long-term. We
are neutral on the sector due to the uncertain scenario in both the
domestic as well as global economy. We will revisit our stand when the
global and domestic economy nears stabilisation and better footfalls and
conversion are seen happening in the sector.

Result Summary
Exhibit 1: Coverage Universe (Consolidated)

(Rs. Crore)
Sales (%) change EBIDTA (%) change PAT (%) change
Company JFM09 Y-o-Y Q-o-Q JFM09 Y-o-Y Q-o-Q JFM09 Y-o-Y Q-o-Q
Koutons Retail 497.54 34.00 105.80 88.80 24.40 103.95 37.95 6.72 184.97
Vishal Retail 291.05 -8.59 -18.12 34.60 -0.16 -20.99 1.95 -81.24 -9.43
Total 788.59 14.34 32.05 123.40 16.37 41.30 39.90 -13.18 157.90
Source: Company, ICICIdirect.com Research

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Koutons Retail (KOURET)
Koutons Retail India, a specialty discount company, operates through
“Koutons” and “Charlie Outlaw” outlets throughout the country. At the end
of Q3FY09, the company had a network of 1424 outlets (including Koutons
and Charlie Outlaw outlets) across the country. The company follows an
asset-light business model wherein 93% of stores are under franchise
agreement. It primarily caters to the men’s apparel segment and is now
increasing its offering to women and kids apparels, accessories and
footwear segments.
• We expect Q4FY09 revenues to increase by 34.0% YoY to Rs 497.54
crore primarily driven by space expansion undertaken during the
first three quarters. The revenue per sq ft is expected to decline by
12.49% due to the weak consumer sentiments with the ongoing
economic slowdown
• With the economic slowdown expected to continue for the next 12
to18 months, consumer sentiments have further weakened. The
company, known for its discount retailing model, increased its
discounts in the quarter. It offered flat 80% discount on almost all
the products throughout the quarter to lure customers and survive
in the tough macroeconomic scenario. As a result, the revenue per
sq ft is expected to decline by 12.49% YoY. We expect the
operating margin to decline to 17.8% in Q4FY09 from 19.2% in the
corresponding quarter of the previous year
• We expect approximately 42% of annual FY09E revenues to be
reported in Q4FY09 due to the concentration of stores in the north
• At the CMP of Rs 455 per share, the stock is trading at a P/E of 13.5x
its revised FY10E EPS of Rs 33.70. We are positive on the asset-light
model of the company and the value retail segment in which the
company operates. We maintain our target price at Rs 505 with
PERFORMER rating
Exhibit 2: Quarterly Estimates

(Rs. Crore)
Q4FY09E Q4FY08 Q3FY09 Y-o-Y (%) Q-o-Q (%) 9mFY09 FY09E
Sales 497.54 371.29 241.76 34.00 105.80 683.04 1180.58
EBIDTA 88.80 71.39 43.54 24.40 103.95 121.12 209.92
EBIDTA margin 17.85 19.23 18.01 17.73 17.78
Profit 37.95 35.56 13.32 6.72 184.97 43.73 81.68
Profit margin 7.63 9.58 5.51 6.40 6.92
EPS 12.40 11.62 4.35 6.72 184.97 14.29 26.69
Source: Company, ICICIdirect.com Research

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Vishal Retail (VISRET)
Vishal Retail Ltd, incorporated in 2001 by Ram Chandra Agarwal, is in the
business of value retailing with focus on Tier II and Tier III cities. The
company operates 182 stores with a retail space of 2.9 mn sq ft across the
country. The company sells over 100,000 stock keeping units (SKUs) across
categories of apparels (60.1% of sales in Q3FY09), non-apparels (19.5%),
FMCG (24%) and others (1.5%). In order to strengthen its operations, it has
set up two manufacturing facilities with a total capacity of 5000 pieces per
day. To ensure strong logistics support, the company established 29
warehouses in eight cities with a total space of 1.05 mn sq ft and a fleet of
trucks for transportation.
• We expect Vishal Retail to report an 8.59% YoY decline in revenue
on account of expected 31.8% YoY decline in revenue psf. The
company is going through a severe liquidity crunch wherein
inventory management is a key concern. Non-availability of right
products coupled with weak consumer sentiments is expected to
result in a decline in revenue for the quarter
• We expect a 100 bps YoY increase in the EBIDTA margin on
account of cost cutting measures adopted by the company
including centralisation of distribution system
• We expect the net profit to decline by 85% YoY to Rs 1.95 crore due
to more than 100% expected increase in interest cost coupled with
lower sales
• At the current market price of Rs 40, the stock is trading at 3.4x its
FY10E earnings of Rs 11.62 per share. The company is undergoing a
severe liquidity crunch and has almost halted its expansion plans for
the near term. In the current economic scenario, wherein the
footfalls are reducing, consumer sentiments are weak and
consumers are postponing their discretionary requirements, we
believe the company will continue facing tough times for the next
couple of quarters. We maintain our UNDERPERFORMER rating

Exhibit 3: Quarterly Estimates

(Rs. Crore)
Q4FY09E Q4FY08 Q3FY09 Y-o-Y (%) Q-o-Q (%) 9mFY09 FY09E
Sales 291.05 318.41 355.45 -8.59 -18.12 1090.34 1381.39
EBIDTA 34.60 34.65 43.79 -0.16 -20.99 134.93 169.52
EBIDTA margin 11.89 10.88 12.32 12.37 12.27
Profit 1.95 10.40 2.15 -81.24 -9.43 20.27 22.22
Profit margin 0.67 3.27 0.61 1.86 1.61
EPS 0.87 4.64 0.96 -81.24 -9.42 9.05 9.92
Source: Company, ICICIdirect.com Research

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 Coverage Universe Valuation table

M Cap EPS P/E (x) EV/EBIDTA (x) ROCE ROE

CMP TP Rating (Rs Cr.) FY08 FY09E FY10E FY08 FY09E FY10E FY08 FY09E FY10E FY08 FY09E FY10E FY08 FY09E FY10E
Koutons (KOURET) 455 505 P 1,392 22.75 26.74 33.70 20.00 17.02 13.50 11.75 9.26 8.21 19.16 19.04 19.13 19.87 18.94 19.27
Vishal (VISRET) 40 46 UP 90 18.15 9.92 11.62 2.20 4.03 3.44 4.69 5.00 4.54 12.57 12.64 13.76 14.99 7.57 8.15

Source: Company, ICICIdirect.com Research

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 RATING RATIONALE
ICICIdirect.com endeavours to provide objective opinions and recommendations.
ICICIdirect.com assigns ratings to its stocks according to their notional target price vs. current
market price and then categorises them as Outperformer, Performer, Hold and
Underperformer. The performance horizon is two years unless specified and the notional target
price is defined as the analysts' valuation for a stock.
Outperformer (OP): 20% or more;
Performer (P): Between 10% and 20%;
Hold (H): +10% return;
Underperformer (UP): -10% or more;

Pankaj Pandey Head – Research pankaj.pandey@icicidirect.com

ICICIdirect.com Research Desk,

ICICI Securities Limited,
Gr. Floor, Mafatlal House,
163, HT Parekh Marg,
Backbay Reclamation
Churchgate,
Mumbai – 400 020

research@icicidirect.com

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