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Puneesh \n Garg, Outlook Money<\/i><\/p>\n Puneesh \n Garg, Outlook Money<\/i><\/p>\n
30 May \n 2012<\/i><\/p>\n
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Following \n the emergence of modern trade norms in the 1990s, India’s \n $550 billion to $600 billion retail sector, has been growing at \n 15 per cent annually. However, in the organised retail sector, \n which makes up for 8 per cent of overall retail space, the last \n 6-9 months witnessed a decline in growth. <\/p>\n
The recent decision by market leader Pantaloon Retail India (PRIL) \n to sell its controlling stake in the “Pantaloons store” \n business to a bigger and deep-pocketed Aditya Birla group—which \n also runs its own fashion stores like Madura Garments—to \n reduce its ballooning debt of around Rs. 8,000 crore is only a \n reflection of the overall retail space. And, this may just be \n the beginning.
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Says Devangshu Dutta, CEO, Third Eyesight, a retail consultancy: \n "As the margins are thin and operating costs continue to \n rise, I would expect more retailers looking to sell completely \n or partly to other business groups and, as and when they are allowed, \n also to foreign investors.” <\/b><\/p>\n
Like Dutta, many experts have already started talking about mergers \n & acquisitions in the post foreign direct investment in retail \n scenario. A Pricewaterhouse-Coopers’ report, on winning in \n India’s retail sector, says consolidation is expected as the market \n dynamics take over to create a more competitive marketplace following \n the entry of multinational companies. However, it seems that consolidation \n has started even before foreign companies were allowed to make \n inroads. <\/p>\n
Says Dutta: “The Indian consumer market is in a curious \n state of mixed development. It is far from being “mature”. \n The bulk of the market is still addressed by traditional and fragmented \n retail operations. Yet, there are M&A activities among larger \n groups, something that is usually seen in highly consolidated \n and developed markets.” <\/b><\/p>\n
Ankur Bisen, associate vice-president, Technopak Advisors, a \n consulting firm, adds: “Many retailers have realised that \n the strategies of the West can’t be adopted in the Indian \n context. As organised retail grows there can be more surprising \n outcomes.” But, what does the Pantaloon-Aditya Birla Group \n deal mean for listed players? Let’s explore.<\/p>\n
PANTALOON INDIA<\/b>
\n <\/p>\n
Soon to be renamed as Future Retail India, PRIL has come a long \n way since it launched its fi rst “Pantaloons format” \n in Kolkata in 1997. Over the years, it had become the leading \n fashion retail format in India with 65 stores, a combined retail \n space of around 2 million sqft and a turnover of around Rs. 1,700 \n crore, Pantaloons is set to hand this fl agship format division \n to India’s prominent conglomerate, Aditya Birla Nuvo (ABNL). \n On the face of it, the deal looks positive as the Biyani’s \n will be able to reduce around Rs. 1,600 crore debt by demerging \n 2 million sqft of the total 16.3 million retail space. Says Ankur: \n “Though PRIL started as the fashion retailer, over the years \n it added another format and now Pantaloons is just a small part \n of it”. <\/p>\n
However, Pantaloons was the most profi table division in terms \n of margins. While retaining part ownership and management of Pantaloons, \n the Biyanis will focus on the food & grocery and value-apparel \n formats — Fashion at Big Bazaar and Brand Factory. Incidentally, \n ABNL’s More competes with Biyani’s Big Bazaar. PRIL also wants \n to sell stakes in Future Capital Holdings and insurance business \n to raise funds and pare down its debt further. While retail consultants \n feel that by reducing debt, PRIL’s focus on the FMCG space can \n take it to higher trajectories in the medium term.<\/p>\n
Speaking on the condition of anonymity, an analyst tracking the \n company, says: “Though the company has managed to reduce \n around Rs. 1,600 crore of debt, and may further pare it down by \n selling stakes in its non-core businesses, it will be left with \n low-margin business. Besides, it is facing slowdown on operational \n fronts too, the same store sales growth has not been encouraging \n for the last 6-9 months”. Therefore, the stock may be de-rated \n once the deal goes through.<\/p>\n
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ADITYA \n BIRLA NUVO<\/b>
\n <\/p>\n
Biyanis selling out to Birlas may not be cheered by Pantaloons’ \n investors, but participants say, it will give ABNL the much-needed \n opportunity to expand its own brands such as Louis Philippe, Van \n Heusen, Allen Solly and Peter England from Madura Fashion & \n Lifestyle. This will also catapult ABNL to the pole position in \n the branded fashion space. With a pan-India presence, ABNL is \n a $4 billion conglomerate with interests across sectors—from \n financial services and telecom to fashion and lifestyle. Since \n fashion and lifestyle forms 12 per cent of the group (before the \n Pantaloons buy), valuing the company based on its retail presence \n is a difficult task. So, investing in its retail business is ill \n advised for now.<\/p>\n
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OTHER RETAIL STOCKS<\/b><\/p>\n
With around 3.1 million sqft of retail space, Shoppers Stop is \n yet another pioneer in the organised retail space in India. It \n is predominantly present in tier 1 and tier 2 cities. It has presence \n in value retailing through the Hypercity chain of stores. The \n company’s consolidated revenues and profits were Rs. 2,505 \n crore and Rs. 43 crore, respectively, in FY12. At this price, \n the stock trades at 1.12 times its sales. <\/p>\n
Similarly, Trent, a Tata enterprise, is also a fashion-cum-food \n and merchandise retailer. The company has 61 Westside stores. \n The latest annual results said the company earned a meagre Rs. \n 7 crore on sales of Rs. 1,700 crore, resulting in a price-to-sales \n ratio of 1.40. This is pretty high compared to PRIL and US major \n Walmart which trades at 0.28 times and 0.45 times, respectively. \n
\n <\/p>\n
Then there are other retail chains forming a small part of bigger \n group companies—Reliance Trends owned by Reliance Industries \n and Spencer’s by RP-Sanjeev Goenka Group—that have also failed \n to make profits from their retail businesses. <\/p>\n
One would have made huge money in Pantaloons 10 years ago, as \n the Indian economy was connecting with the world and organised \n retail was making inroads. Says Charles Munger: “When you’re \n an early bird, there’s a model that I call "surfing"—when \n a surfer catches the wave and stays there, he can go a long, long \n way.” <\/p>\n
Pantaloons was the surfer in the great retail wave and has been \n rewarded well. However, since 2006 a Pantaloons investor have \n not gained much at a time the markets rose around 57 per cent. \n The Shopper Stop and Trent stocks also moved along the same way. \n Apart from low margins, the retail sector is also facing a number \n of bottlenecks on the policy front. The goods and services tax \n (GST), which was to be implemented in April 2012, remains in suspension \n and the ector has not been given industry status. Says Ankur: \n “Organised retail, despite limitations, will grow leaps and \n bounds in the next decade. There will be many surprises along \n the way as companies discover the right Indian model of retailing” \n <\/p>\n
So, investors must wait till the retail sector gets its turn. \n Invest only if you find deep discount on these stocks, similar \n to the discounted merchandise at retail stores.<\/p>\n","protected":false},"excerpt":{"rendered":"
Puneesh Garg, Outlook Money 30 May 2012 Following the emergence of modern trade norms in the 1990s, India’s $550 billion to $600 billion retail sector, has been growing at 15 per cent annually. However, in the organised retail sector, which makes up for 8 per cent of overall retail space, the last 6-9 months witnessed […]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"content-type":"","footnotes":""},"categories":[3],"tags":[],"class_list":["post-3060","post","type-post","status-publish","format-standard","hentry","category-press-quotes"],"yoast_head":"\n