retail sector - 12 november 2002 sr

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ENAM Se c ur i t ie s

India

Retail Sector

Emerging star

ENAM Research is available on Bloomberg (ENAM <Go>) and Firstcall.com 12 November 2002

S E C T O

R

R E P O

R T

Retail Index vs Sensex

0

100

200

300

400

1999 2000 2001 2002

Retail Index BSE Sensex

Source: CMIE

Stock performance

0

20

40

60

80

00 01 02 03 04

0

50

100

150

200

Pantaloon (LHS)

Trent (RHS)

(Rs.) (Rs.)

E E

Source: CMIE

! A favourable macro economic environment has brought Indian

retail to the threshold of a transformation. Organised retail

seeks to fill the gap created between consumer demands and

aspirations unmet by traditional retailing formats.

! Large corporate houses are putting major bets on the sector,

which at the moment is clearly in the investment phase. These

players have begun to redefine the retail industry.

! Competing with unorganised players would call for strategic

investments in the supply chain and extending these

operational gains to customers.

! While there has been a significant enhancement of the key

enablers of modern retail, regulatory and infrastructural barriers

remain formidable.

! Retail economies demand size and scale. Profitability will

improve as retailers scale and adopt global best practices.

! The retail sector offers lucrative opportunity to investors with a

longer-term investment outlook. We recommend a BUY on both

the listed players – Pantaloon and Trent.

RoCE vs P/E Valuation matrix

0

10

20

30

2000 2001 2002 2003 2004

0

10

20

30

Pantaloon & Trent RoCE (LHS)Pantaloon & Trent PE (RHS)

(%) (x)

E E 0

5

10

15

Could be better Changing

fundamentals

Strong

P/E (x)

Sector financial summary

Company Price Mkt cap EPS (Rs.) CAGR (%) RoE (%) P/E (x) EV/EBITDA (x)

(Rs.) (Rs. m) FY03E FY04E FY02-04E FY03E FY03E FY04E FY03E FY04E

Pantaloon 42 850 6 11 55 16 8 4 5 4

Trent 154 2,021 7 8 11 5 22 19 9 8

Source: ENAM estimates

Analyst: Kamlesh Ratadia

Email: [email protected]

Tel: 9122 5631 1040

Y



Retail Sector

NOVEMBER 2002 ENAM Securities 2

Contents

Executive Summary..............................................................................................3

Industry Dynamics................................................................................................5

What is Retail? .....................................................................................................6

Structure of Indian Retail ......................................................................................8

Trends in Indian Retail ...................................................................................... 14

Retail Dynamics & Economics .......................................................................... 25

Valuations.......................................................................................................... 29

Recommendation .............................................................................................. 32

Companies Section

Pantaloon Retail .................................................................................................37

Trent ...................................................................................................................41



Retail Sector


Executive Summary

Indian retail is rapidly moving on the evolution curve

Various structural (social and demographic) and macro economic factors have

brought retailing at the threshold of a transformation. Rising income levels,

‘baby boomer’ phase of the Indian economy, nuclear family structure, and

exposure to international brands and media have raised aspirations of the

consumers who now demand a complete shopping experience. There has been

a marked shift in consumer attitude from ‘self denial’ to ‘affordable indulgence’,

arising from changing values and higher incomes.

The addressable opportunity is hugeA highly fragmented unorganised industry, saddled with considerable

operational and systemic inefficiency, has created a large addressable

opportunity for organised players.

Organised retail currently accounts for 2% of the $180bn retail market in India.

By offering a compelling proposition, organised players can shift substantial

market share away from the traditional formats. If international experience is

anything to go by, organised retail in India could grow to 10% of the market over

the next 10 years.

Rapid transformation

Years taken for supermarkets to growfrom <5% to current share

Current share ofSupermarkets (%)

10 (1988-98)

10-15 (1980s)

8-9 (1991-99)

10 (1990-2000)

Thailand

Brazil

Poland

China

40

20

36 (1995)

~19

CountryYears taken for supermarkets to growfrom <5% to current share


10 (1988-98)

10-15 (1980s)

8-9 (1991-99)

10 (1990-2000)

Thailand

Brazil

Poland

China

40

20

36 (1995)

~19

Country

Source: McKinsey

Organised retail in India in the next 8-10 years will be…

If it follows China If it follows Thailand

Grocery: ! 10% of organised sector = $12bn

! Top 3 players = ~$1.2bn each

40% of organised sector = $48bn

Top 3 players = ~$4.8 bn each

Apparel: ! 35% of organised sector = $6bn

! Top 5 chains = $300m each

Source: McKinsey

The $180bn retail market isat the threshold of atransformation

Organised retailing expectedgrow to 10% of retail market



Retail Sector


However, retail is a difficult business to manage and scale. Therefore, we do

not believe that the transformation would be easy or that retail offers easy

pickings for an entrepreneur with capital or real estate. There exist serious

bottlenecks to growth on the regulatory, infrastructure and supply chain fronts.

Moreover, unorganised players compete favorably with organised retailers on

convenience, service and price. According to a study done by McKinsey,

organised retailers are at a 32% tax disadvantage vis-à-vis traditional retailers

owing to tax evasion that exists in the system. The only way organised retailers

can counter this significant disadvantage is by dealing with inefficiencies in

supply chain and passing on the benefits of operational efficiency to consumers.

The route to success

The two pillars on which a retail business rests are a compelling buying

proposition to drive growth and a strong operational management to drive

profitability. Together, these factors are sure to build a successful business.

The virtuous cycle

Better

bargaining

Rationalizationof intermediaries

Reduces

Retail economiesof space

Increased share of customer basket

Increasedconversion

Time to marketCost

Productrange

Value formoney

Highvolume

Increases

Better

bargaining


Reduces



Increasedconversion

Time to marketCost

Productrange

Value formoney

Highvolume

Increases

Source: ENAM Research

ConclusionRetailing is an emerging business with significant growth potential. Many of the

world’s leading entrepreneurs have successfully walked down this path. With

Indian retailers having passed the learning curve, it may now be India’s turn.

In our view, it would be prudent to buy businesses with strong business models

and critical mass. In the listed space, we believe both Pantaloon and Trent have

a robust business model and offer a lucrative investment opportunity for long-

term investors. BUY

Retail is a difficult businessto manage and scale

To succeed, organisedretailers should deal withsupply chain inefficiencies

Compelling buying proposition and strong

operational management prerequisites to success

Investors should buy strongscalable businesses



Retail Sector


Industry Dynamics

Comparative valuations

(Rs. m) Pantaloon Trent

Price (Rs.) 42 154

Shares o/s (m) 17 13

Market cap 727 2,017

Borrowings 1,098 11

Enterprise value 1,785 769

Operating profit margin (%) 8.8 8.5

RoCE 12.2 5.6

RoE 17.7 4.7

Earnings per share (Rs.)

FY02 4.7 6.7

FY03E 5.6 7.1

FY04E 11.3 8.2

CAGR (%) 55.1 10.6

EV to EBIDTA (x) FY04E 3.8 7.8

P/E (x) FY04E 4.0 17.3

Source: Annual Report, ENAM Research

Porter analysis

Substitutes

# Unorganised retailers offerconvenience and price advantage

Low

Low

High

Low

Buyers

# Fragmented nature ofindustry and nominal orno costs of switching

# Buyers are brand loyalnot store loyal as yet

Suppliers

# Organised retail not yetan important customer ofthe supplier group

# Switching costs from onesupplier to another arehigh

# Threat of forwardintegration by suppliers

# Quality of slattedmanpower,merchandisers, etc

New entrants

# Economies of scale, capital intensity,location and technology barriers aremajor bottlenecks

# Product differentiation and customerloyalties are other barriers

# Restrictive regulations

# FDI barred

Competitive pressure

# Fragmented & highlycompetitive segment.

#

Brand loyal customersrather than store loyal

Substitutes

# Unorganised retailers offerconvenience and price advantage

Low

Low

High

Low

Buyers

# Fragmented nature ofindustry and nominal orno costs of switching

# Buyers are brand loyalnot store loyal as yet

Suppliers

# Organised retail not yetan important customer ofthe supplier group

# Switching costs from onesupplier to another arehigh

# Threat of forwardintegration by suppliers

# Quality of slattedmanpower,merchandisers, etc

New entrants

# Economies of scale, capital intensity,location and technology barriers aremajor bottlenecks

# Product differentiation and customerloyalties are other barriers

# Restrictive regulations

# FDI barred

Competitive pressure

# Fragmented & highlycompetitive segment.

#

Brand loyal customersrather than store loyal




Retail Sector


What is Retail?

RETAIL IS A CHANNEL OF DELIVERYIn a market economy, transactions take place at a large scale, both in terms of

volume and variety – this necessitates an interface between manufacturers and

final consumers. Retailers provide the interface between production and

consumption. Retailing is sale of goods or services to consumers for their

personal, family or household use. It is the final stage in distribution of goods

and services from manufacturers to consumers.

Based on a recent Central Statistical Organisation (CSO) release, private final

consumption of consumers in India stood at about Rs.15,000bn in FY02. Of this

total private consumption, retail accounted for Rs.9,000bn.

Private final consumption in India

Clothing and

footwear

5%

Rent fuel

and power

12%Medical and

health services

8%Transport and

communication

13%

Recreation,

education and

cultural services

4%

Misc. goods

and services

9%

Food beverages

and tobacco

49%

Source: CSO, FY02

Retail is the final stage indistribution of goods andservices from manufacturers

to consumers



Retail Sector


RETAIL CATEGORIESRetailing includes sale of food & beverages, clothing & footwear, cosmetics,

pharmaceutical products, jewellery, electronics and other consumer durable

products. Of this, food and beverages, apparel and consumer durables are the

top three categories and form 87% of the total retail sales within India.

Category-wise retail sales

(Rs. bn) Total Branded Organised retail

Food, grocery & tobacco 6,700 260 20

Clothing & textiles 620 125 50

Consumer durables 360 185 15

Jewelleries & watches 360 50 25

Home décor + furnishing 260 10 5

Beauty care 185 35 0

Pharmacies 185 175 5

Footwear 90 35 20

Books, music & gifts 75 35 5

Total 8,850 900 150

Source: Image Retail

Food retailing: Food and beverages, the largest item of personal consumption,

is the largest retailing segment in any economy. In India, this category of final

private consumption was $134bn (accounting for 76% of total retail sales) in

size in FY02. Food products are dispensed through formats ranging from Kirana

(small corner shops) to supermarkets.

Apparel retailing: This category accounts for $12.4bn (7%) of total retail sales.

It is the second largest opportunity for organised retailers. The market is highly

fragmented with players operating across a wide variety of formats. Branded

apparel accounts for 20% of the total apparel market, of which men’s clothing

forms 70%, children’s wear 22% and women’s wear 8%.

Consumer durable retailing: The consumer durables market is ~$7.2bn (4%

of total retail sales) in size. Television is the largest category within the

consumer durable segment with penetration of over 80m households. Product

standardisation led to the consumer durables category being tapped early by

organised retailers. Most of the corporates have a network of exclusive stores

(manufacturer-retailer), which are either owned or operated on the franchise

model. There is a parallel network of authorised dealers in this segment.

The top three categoriesform 87% of the total retailsales within India



Retail Sector


Structure of Indian Retail

INDIAN RETAIL IS HIGHLY FRAGMENTED In sharp contrast to the global retail sector, retailing in India – though large in

terms of size – is highly fragmented and unorganised. With close to 12 million

retail outlets of less than 500 sq. ft average size, India has the largest retail

density in the world. Retailers include street vendors, local supermarkets,

department stores, restaurants, hotels, and even bike and car showrooms.

Fragmented nature of Indian retail

85 81

5540 36 30

20

1

15 19

45

6064

7080 80

98 99

~2

15-20

U S

T a i w a n

M a l a y s i a

T h a i l a n d

B r a z i l

I n d o n e s i a

P o l a n d

C h i n a

I n d i a

P a k i s t a n

# ~12 mretailoutlets inIndia

# Largestchain hassales lessthan anaverageCarrefourstore

Traditionalchannel

Modernchannel e.g.

# Supermarkets# Convenience

stores# Hypermarkets

100% = $ 2325 115 20 22 ~100 ~75 55 325 180 18*bn

85 81

5540 36 30

20

1

15 19

45

6064

7080 80

98 99

~2

15-20

U S

T a i w a n

M a l a y s i a

T h a i l a n d

B r a z i l

I n d o n e s i a

P o l a n d

C h i n a

I n d i a

P a k i s t a n

# ~12 mretailoutlets inIndia

# Largestchain hassales lessthan anaverageCarrefourstore

Traditionalchannel

Modernchannel e.g.

# Supermarkets# Convenience

stores# Hypermarkets

100% = $ 2325 115 20 22 ~100 ~75 55 325 180 18*bn

Source: McKinsey

Based on ownership and management style, the industry can be classified into

two categories – unorganised and organised. Rural counter stores, kiosks,

street markets and vendors, where the ownership and management rest with

one person, are classified as traditional or unorganised retail outlets. These

formats typically require employees with low skills and account for 66% of the

sector’s output. These are highly competitive outlets, thriving on free land(unregistered kiosks or traditional property), unpaid/cheap labour (family

members or village children paid below minimum wages) and zero taxes. Many

of them also leverage the low or no cost of family labour to provide services like

home delivery that would be uneconomical for any organised retailer.

India has the largest retaildensity in the world

Industry dominated byunorganised retailers



Retail Sector


Traditional retail formats

Value position Examples

Format Definition Large selection High service Low price India Other countries

Counter stores Food: Family run

stores, selling

essentially food items

– Kirana'

stores

Neighbourhood

mom & pop stores

Non food: Retail

multiple (often local)

brands

– –

Kiosks Pavement stalls

selling limited variety

of food and beverages

– – Paan shops

Street markets Regular markets held

at fixed centers

retailing food and

general merchandise

items

– Village

haats

Bazaars (Poland),

Wholesale

markets (Russia)

Street vendors Mobile retailers

essentially selling

perishable food items

- fruits, vegetables,

milk, eggs, etc.

– – Vegetable

vendors

Source: McKinsey

Lack of consumer culture and low purchasing power have restricted the

development of modern formats. However, unorganised retailers suffer due to

their inability to offer a wide range of products. This is worsened by their inability

to create economies of scale in sourcing. Therefore, artificially inflated cost

structure due to inefficiency in the supply chain presents a possible opportunity

for organised players to draw on this large market.

EMERGENCE OF ORGANISED RETAILERSPost liberalisation, consumer pattern has undergone a structural change and

customers have become more demanding with the rising standard of living and

changing lifestyles. With rising customer aspirations, the trend has shifted from

just buying to shopping (buying, entertainment and experience).

Globalisation has removed trade barriers and promoted consumerism. Over the

last decade, there has been an explosion of branded goods – both domestic

and international – in the Indian market across product categories. For example,

there was just one brand of salt (Tata Salt ) in the 1980s in the Indian market.

This year, consumers find at least six national brands of salt jostling for space

on the shelves of a retail supermarket. Edible oil used to be largely sold loose

till a few years ago. Today, there are at least 10 known brands of oil.

With rising customer

aspirations, shopping is nowbuying, entertainment andexperience



Retail Sector


Top 20 brands in the world

Rank Brand value Presence

2000 Brand Country 2000 ($bn) in India

1 Coca-Cola USA 73 $

2 Microsoft USA 70 $

3 IBM USA 53 $

4 Intel USA 39 $

5 Nokia Finland 39 $

6 General Electric USA 38 $

7 Ford USA 36 $

8 Disney USA 34 --

9 McDonald’s USA 28 $

10 AT&T USA 26 $

11 Marlboro USA 22 $

12 Mercedes Germany 21 $ 13 Hewlett-Packard USA 21 $

14 Cisco Systems USA 20 $

15 Toyota Japan 19 $

16 Citibank USA 19 $

17 Gillette USA 17 $

18 Sony Japan 16 $

19 American Express USA 16 $

20 Honda Japan 15 $


Another factor that accelerated the concept of organised retail gaining

momentum is media proliferation. There are at least 70 TV channels currently

being aired in India. The current penetration of television in India stands at over

80m households while cable and satellite (C&S) homes are an estimated 39m.

This has resulted in a barrage of advertisements and brand promotions across

product categories. The resultant exposure to new products and services is

fuelling consumer demand.

Indian FMCG - Ad spend as % of net sales

1

2

3

4

5

1994-95 1997-98 2000-01

6

8

10

12

14

Soaps & Detergents (LHS) Food & Beverage (LHS)

Cosmetics & Toiletries (RHS)

(%) (%)

Source: CMIE, ENAM Research

The exposure to new products and services hasfuelled consumer demand



Retail Sector


Traditional retailers have been unable to keep pace with the changing needs of

consumers, thereby creating a large addressable opportunity for corporate

players aspiring to enter the industry. Each retailer must identify and develop a

strategy offering a compelling value proposition. Most existing formats have

evolved to offer value propositions along the axes of price, convenience andspecialisation.

Organised retail formats: Meeting customer needs

Modern formats Discount stores,

(Hypermarket)

Departmental stores,

(Convenience)

Specialty stores,

(Category killers)

Value proposition Price Convenience Brands/ Service

International Wal-Mart Saks Gap

examples Kroger Marks & Spencer Toys 'R' Us

Tesco JC Penny Benetton

Carrefour Macy Circuit CityDomestic Big Bazaar Shoppers’ Stop Viveks

examples Giant Pantaloons Vijay Sales

Foodworld Westside Arcus

Subhiksha Globus Home Store

Margin Free Ebony Crosswords

Bombay Bazaar Wills Sports Titan

Nilgiri's Barista

Benetton

Arrow


Supermarkets / Hypermarkets

These are large (20,000 sq ft plus) self-service stores selling a variety of

products at discounted prices. Supermarkets tend to be located in key

residential areas and malls. They offer competitive prices on the strength of

economies of scale in logistics and purchasing. This format is new to India and

has been adopted by players like Big Bazaar, Foodworld, Nilgiris and

Subhiksha.

Key players in India

Company No. of outlets Location Retail space (sq. ft.) Est. sales (Rs. m)

Big Bazaar 4 Mumbai, Bangalore, Hyderabad and Kolkata 170,000 430

Foodwolrd 75 Chennai, Bangalore, Hyderabad 365,000 3,600

Pune, Coimbatore, Salem, Pondicherry

Margin Free 214 Kerala 250,000 5,500

Subhiksha 112 Tamil Nadu 100,000 2,000

Nilgiris 26 Karnataka 89,000 2,300

Bombay Bazaar 250 Hyderabad, Kolkata, Bangalore, Mumbai 170,000 430

Source: Company, Image Retail

Modern formats offer value propositions along the axes

of price, convenience andspecialisation

Self-service stores selling avariety of products at

discounted prices



Retail Sector


Departmental storesThese large stores retail primarily non-food items such as apparel, footwear,

accessories, cosmetics and household products. They stock multiple brands

across product categories, though some of them focus on their own store label

(on the lines of Marks & Spencer’s and St. Michael). These stores are found on

high streets and as anchors of shopping malls. Several local departmental store

chains have opened shop in India in the past five years.


Company No. of outlets Location

Retail space

(sq. ft)

Est. sales

(Rs. m)

Shoppers' Stop 9 Mumbai, Delhi, Banglore, Hyderabad, Jaipur, Chennai, Pune 349,000 2,500

Pantaloon 13 Hyderabad, Kolkata, Banglore, Chennai, Mumbai, Kanpur,

Nagpur, Ahmedabad, Pune

199,300 1,312

Westside (Trent) 9 Delhi, Mumbai, Kolkata, Hyderabad, Chennai, Bangalore, Pune 170,000 770

Ebony 7 Delhi, Noida, Jalandhar, Ludhiana, Chandigarh, Chennai 192,000 1,000

Lifestyle 3 Hyderabad, Bangalore, Chennai 115,000 750

Source: Company, ENAM estimates

Specialty chainsThese retail outlets focus on a particular brand or product category, usually non-

food items, and are located on high streets and in shopping malls. While most

specialty chains compete on service, a segment called “category killers” offers

price as an advantage (Toys ‘R’ Us is an example of this). Other specialtychains include Gap, Levi’s and Benetton.


Company No. of outlet Location

Retail space

(sq. ft.)

Est. sales

(Rs. m)

Viveks 19 Bangalore, Chennai, Madurai Salem, Coimbatore, Tirunelveli 1,40,000 1,170

Jainsons 17 Chennai, Salem & Trichy, Coimbatore, Madurai, Erode, Hosur,

Nagerkoil

60,000 560

Vijay Sales 8 Mumbai 26,000 115

Source: Image Retail, ENAM estimates

These stores retail non-fooditems like apparel, footwear,

accessories, cosmetics andhousehold products

These outlets focus on abrand or single productcategory



Retail Sector


The concept of organised retail channels like supermarkets, department stores

and specialty chains is relatively new in the Indian market and has been around

only for the last decade. Organised business is currently not very large and is

worth $3bn or ~2% of the total retail market. Thus, penetration levels are low

compared to other developing countries such as China and Indonesia whereorganised retail accounts for 20-30% of total retail sales. With the entry of large

corporates in this segment, these formats offer the best value proposition to

customers owing to highly efficient cost management. A survey of food segment

in India reveals that organised players have eaten into the market share of

unorganised players.

Supermarkets have made a dent in the food segment

0 20 40 60 80 100

Atta

Butter

Rice

Bread

Detergents

Tea

Vegetables

Fruits

Kirana store Supermarket Dairy outlet Other

(%)

Source: KSA

Organised formats seek tooffer better value to

customers by improvingefficiency



Retail Sector


Trends in Indian Retail

INDIAN RETAIL INDUSTRY IS EVOLVING There are four distinct phases through which retail would pass in its evolution

cycle. In the first phase, new entrants create awareness of modern formats and

raise consumer expectations. In the second phase, consumers demand modern

formats as the market develops – thereby leading to strong growth. As the

market matures, intense competition forces retailers to invest in back-end

operating efficiency. In the final phase, retailers explore new markets as well as

inorganic opportunities as growth tapers off.

The different phases in retail

G r o w t h

Third gearFirst gear Fourth gearSecond gear

1995 2000 2005 2010

Retailersstrengthening

backend system

New retail entrantsdriving growth

Retailers goingglobal / M & A

Consumers demandsorganised formats

Strengtheningback-end management

Createawareness

ConsolidationIncrease customerexpectation

G r o w t h

Third gearFirst gear Fourth gearSecond gear

1995 2000 2005 2010

Retailersstrengthening

backend system

New retail entrantsdriving growth

Retailers goingglobal / M & A

Consumers demandsorganised formats

Strengtheningback-end management

Createawareness

ConsolidationIncrease customerexpectation

Source: KSA

Over the last seven years, retailing in India has undergone a sea change.

Organised retailing has picked up momentum as is evident from the number oflarge format stores planned over the next two years and an expected

investment of Rs.10bn. Substantial investments by corporate players such as

the Tatas, Birlas, Rahejas and Pantaloon have already started paying off.

Retail passes through fourdistinct phases in the courseof its evolution

Organised retailing has

picked up momentum overthe past seven years in India



Retail Sector


Investments planned in large format stores

E x i s t i n g S t o r e s

D e l h i / N o

i d a / G u r g a o n

M u m b a i / T h a n e

C h e n n a i

K

o l k a t a

H y d e r a b a d

B a

n g a l o r e

P u n e

A h m

e d a b a d

J

a i p u r

C h a

n d i g a r h

I n d o r e

N

a g p u r

O

t h e r s

Shoppers’ Stop 9 1 3 3 4 1 1 1 1 1

Pantaloon 13 2 2 2 2 2 3 1 1 1 1

Big Bazaar 4 1 1 1 1 1

Westside 8 2 1 1 1 1 1 1

Lifestyle 3 1 1 1 1 1

Globus 4 1 2 1

Ebony 7 3 1 1 1 1 1 2 1

Piramyd 2 1 2 1

Total stores 50 6 6 9 11 8 1 4 7 1 4 4 1 1 1 1 1 1 3 3

Existing stores Stores planned

Source: Image Retail

These formats have been well received by India’s consuming class, and are

witnessing strong growth on the back of increased consumerism and mounting

consumer aspirations. Over the next two years, it is estimated that these

formats would garner more than Rs.250bn of revenues. It is now critical for

retailers to offer compelling enough propositions, either in terms of product

range or price, to make the housewife switch from her preferred store. Retailers

such as Big Bazaar, Shoppers’ Stop, Viveks and Food World have proved that

consumers do and will switch if retailers offer a compelling proposition.

As the sector enters the third phase of evolution, supply chain management will

attain top priority. Fierce competition will force retailers to quickly respond to

changes in the market – this highlights the importance of supply chain

management in managing stock availability, supplier relationships, new value

added services and cost cutting. In this phase, supply chains will compete with

each other, rather than players competing on products and marketingtechniques alone. Therefore, the focus would be to ensure that right goods are

available at the right place, right time and right cost, and in the right quantity.

Eventual winners will emerge from among players who have the best

supply chain to respond more accurately to customer demands by

minimising the flow of material at every point in the pipeline, keeping

inventory to a minimum and deriving competitive edge by giving better

service through shorter cycle times.

In the final phase, retailers will go global to find new markets for growth, theindustry will consolidate and weaker players will perish.

Consumers switch ifretailers provide a reason todo so

The focus would shift to

reducing cost and improvingoperational efficiency

Retailers with best supplychain would eventuallyemerge as winners



Retail Sector


How long would it take for the transformation to happen?

Indian retail is at the threshold of a transformation. Although organised retailing

in India is at a nascent stage, the transformation could – in all probability – be

as fast as experienced in other developing nations such as China and Poland.

Hypothetically, if we assume the Indian organised market to evolve along thelines of China, then organised grocery retail would attain sales of $12bn over

the next 8-10 years. If retail penetration in India reaches levels similar to China,

it would not be unrealistic to imagine a $1.2bn national grocery chain or a

$300m apparel retail chain in the next 10 years in the country.

Transformation can be quite rapid

Years taken for supermarkets to growfrom <5% to current share


10 (1988-98)

10-15 (1980s)

8-9 (1991-99)

10 (1990-2000)

Thailand

Brazil

Poland

China

40

20

36 (1995)

~19

CountryYears taken for supermarkets to growfrom <5% to current share


10 (1988-98)

10-15 (1980s)

8-9 (1991-99)

10 (1990-2000)

Thailand

Brazil

Poland

China

40

20

36 (1995)

~19

Country

Source: McKinsey

Organised retail in India in the next 8-10 years will be…

If it follows China If it follows Thailand

Grocery: ! 10% of organised sector = $12bn

! Top 3 players = ~$1.2bn each

40% of organised sector = $48 bn

Top 3 players = ~$4.8 bn each

Apparel: ! 35% of organised sector = $6bn

! Top 5 chains = $300m each

Source: McKinsey

However, retail is a difficult business to manage and scale. Therefore, we do

not believe that the transformation would be easy to achieve or that retail offers

easy pickings for an entrepreneur with capital or real estate. Nevertheless, it isa profitable path and many of the world’s leading entrepreneurs have

successfully walked on it. Now it may be India’s turn.

Internationally,transformation has beenquite rapid



Retail Sector


Bargaining power would eventually shift to consumers

We believe large format stores will expand considerably over the next five years

leading to the entry of more corporate retailers. In a highly fragmented

manufacturing and retail sector, emergence of large corporate players will lead

to a shift in bargaining power from manufacturers to retailers.

In an unorganised retail industry, fragmentation renders bargaining power in the

hands of manufacturers. However, as the industry consolidates, the bargaining

power shifts to retailers. Eventually, as competition intensifies and the market

matures, the bargaining power comes to lie with consumers. It has been

observed in developed nations that as consolidation happened in the industry,

the bargaining power first shifted to retailers and eventually to consumers.

Bargaining power shifts to retailers and eventually to consumers

Industrydictates

Distributorcontrols

Retailercontrols

Consumerdriven

Consumerdictates

5-8 yrs 2-5 yrsIndia

ChinaPhilippines

Indonesia

MalaysiaTaiwan

South Korea

SingaporeHong Kong

Japan

Germany

UK

US R e t a i l e r p o w e r

Industrydictates

Distributorcontrols

Retailercontrols

Consumerdriven

Consumerdictates


ChinaPhilippines

Indonesia

MalaysiaTaiwan

South Korea

SingaporeHong Kong

Japan

Germany

UK


Industrydictates

Distributorcontrols

Retailercontrols

Consumerdriven

Consumerdictates


ChinaPhilippines

Indonesia

MalaysiaTaiwan

South Korea

SingaporeHong Kong

Japan

Germany

UK


Source: KSA

Consumers dictate terms ina mature retail market



Retail Sector


The evolution pattern of retail industry across developed economies is more or

less similar. Two trends emerge distinctly through the course of evolution.

Increase in number of large format stores: Fragmentation in the industry

leads to consolidation and an increase in sales floor space. Thus, the level of

fragmentation reduces and the total number of stores comes down significantly.

Growth of large formats in Japan

80

100

120

140

160

180

90 91 92 93 94 95 96 97 98 99 00 01

Sales floor space Total SalesClothing FoodsOthers

(%)

1,4481,348

1,297 1,275

1,1361,059

1,002

242

249284 290

312

306339

29

30 37 39

49

52 62

2

2 22

3

3 4

900

1,000

1,100

1,200

1,300

1,400

1,500

1,600

1,700

1,800

1982 1985 1988 1991 1994 1997 1999

1-4 employees 5-19 employees

20-99 employees Over 100 employees

('000)

Source: Ministry of Economy, Trade and Industry (Japan)

Change in sales composition: Although overall retail sales grow moderately,

large format stores witness rapid growth on account of large formats grabbing

market share from small formats.

Sales composition by store size in Japan

33 31 28 27 23 22 18

34 3536 36

37 3737

18 19 22 22 24 24 27

15 15 15 15 16 17 18

0

25

50

75

100

1982 1985 1988 1991 1994 1997 1999

1-4 employees 5-19 employees 20-99 employees Over 100 employees

(%)

Source: Japan Census of Commerce, Retail Industry data on Census of Commerce for 1999



Retail Sector


WHAT WILL FUEL THIS TRANSFORMATION?Various structural and macro economic enablers would drive retail

transformation. These include rising income levels, change in demographics,

entry of corporate players, urbanisation, etc.

Rising income levels

Currently, there are 24m upper and middle class households in India. The

combined spending power of these households is estimated at $160bn and is

growing fast.

Economic progress and urbanisation

Income (Rs./yr) Income group

1997-98 prices

Urban (%) Rural (%) Total (%) Growth (%)

1989-1997

>125,000 10 3 5 25

90,001-125,000 11 4 6 18

60,000-90,000 22 10 13 11

30,000-60,000 34 33 34 6

<30,000 22 51 43 (3)

Total no. ofhouseholds (m)

47 118 165

High

Uppermiddle

Middle

Lower middle

Low income

Income (Rs./yr) Income group

1997-98 prices

Urban (%) Rural (%) Total (%) Growth (%)

1989-1997

>125,000 10 3 5 25

90,001-125,000 11 4 6 18

60,000-90,000 22 10 13 11

30,000-60,000 34 33 34 6

<30,000 22 51 43 (3)

Total no. ofhouseholds (m)

47 118 165

High

Uppermiddle

Middle

Lower middle

Low income

Source: NCAER, 1998

On plotting sales from grocery products through modern retailers against

purchasing power parity (PPP), it is clear that as PPP rises, there is a shift

towards modern formats that provide more variety and a better ambience.

Economic development drives channel modernisation

TaiwanArgentina

IsraelMalaysia

Brazil

Thailand

China

IndonesiaIndia

US

0

20

40

60

80

100

0 5,000 10,000 15,000 20,000 25,000 30,000 35,000

GDP/capita (PPP)

G r o c e r y t u r n o v e r

t h r o u g h m o d e r n r e t a i l e r s

(%)

Source: The World Competitiveness Report, Euromonitor

Fundamental changes at themacro level would transformthe retail industry



Retail Sector


Demographic profile

Indian economy is currently experiencing the ‘baby boomer’ phase. According

to the last census, more than 81% of India’s population is below 45 years of

age. More interesting is the fact that 40% of the Indian population (>400m

people) is in the age bracket of 20-40 years.

Age-wise breakup of India’s population

0

100

200

300

400

1996 2001 2006 2010

Upto 4 4 to 19 20 to 34 35 to 59 Over 60

(m)

Source: NCAER

International experience indicates that the pace of development or migration to

organised formats is the fastest when an economy is in the ‘baby boomer’

phase. Most developed countries that experienced the ‘baby boomer’ phaseduring the last decade have seen substantial growth in organised retailing.

Demographics and organised retail

19851990 1995 2000 2005

R a p i d s h i f t t o o r g a n i s e d f o r m a t s

2010

2010

2005

2000

1995

1990

Baby boomer phase

US, Europe, Australia

Thailand, China, Hong,Kong, Singapore, Indonesia,South Korea, Taiwan, UAE

India, Malaysia, New Zealand,Philippines,Pakistan

19851990 1995 2000 2005


2010

2010

2005

2000

1995

1990

Baby boomer phase




19851990 1995 2000 2005


2010

2010

2005

2000

1995

1990

Baby boomer phase







Retail Sector


Changing lifestyles

Nuclear family structure, a growing number of educated and employed women

(which translates into increasing disposable incomes), media proliferation and

growing consumerism have all contributed to the growth of organised retail.

Drivers for change in consumer behaviour

Women are better educated...

Women’senrolment inprofessionalcourses(Engineers) (‘000)

0.80

16.90

...seeking more employment

Femaleemployment(lakhs)

13.18

48.24

‘The stigma associatedwith women’s education’s

is fast getting eroded’

‘The rapid increase in the number ofwomen who are working will drive growthin categories such as convenience foods

and cosmetics’

...and more exposed to media

Exposure to TV(HH) (mil)

6.80

69.10

‘TV is exposing the housewifeto international brands and

consumption habits’

1961

1998

Women are better educated...

Women’senrolment inprofessionalcourses(Engineers) (‘000)

0.80

16.90

...seeking more employment

Femaleemployment(lakhs)

13.18

48.24

‘The stigma associatedwith women’s education’s

is fast getting eroded’

‘The rapid increase in the number ofwomen who are working will drive growthin categories such as convenience foods

and cosmetics’

...and more exposed to media

Exposure to TV(HH) (mil)

6.80

69.10

‘TV is exposing the housewifeto international brands and

consumption habits’

1961

1998

Source: IMRB, Directorate General of Employment and Training, News reports

A number of factors that drive transformation in retail – such as income growth,

changing demographic profile and socio-economic environment – are already in

place in India. However, organised retail has to overcome significant challenges

in terms of regulations and infrastructural barriers in order to realise its full

potential. Although some of these bottlenecks are mere irritants, others

significantly impact the economics and viability of the business.



Retail Sector


ROAD BLOCKS Organised retail faces stiff competition from small traditional formats. These

formats are highly competitive outlets thriving on free land (unregistered kiosks

or traditional property), unpaid/cheap labour (family members or village children

paid below minimum wages) and zero taxes. Many of them also leverage the

low or no cost of family labour to provide services like home delivery that would

be uneconomic for any organised retailer. Organised formats are at a serious

disadvantage compared to unorganised formats on all counts like convenience,

service and price. According to a McKinsey study, unorganised retailers have

the advantage of saving as much as 32% on tax compared to organised

retailers.

Organised retails have 32% net disadvantage vis-à-vis the unorganised sector

95

19

23

32

42

126

145

168163

174

100

165 5

5

11

Ex -

factory

price

Excise

duty

Freight

and

Octroi

Central

sales

tax

Landed

cost to

ditributor

Distri-

butor

margin

Landed

cost to

retailer

Retailer

margin

MRP Standard

discount

Selling

price

Sales

tax

End

consumer

price

Exempt for

small units

Can be

evaded

Can beincreased

Can beevaded

Unreasonably highMRP to accommodatevarying taxes by state

(Percent) 16 4 4 20 25 12

# Multiple levies create multiple opportunities for evasion# Tax evasion results in flexible margin and discounts# Unreasonably high MRPs lead to lack of price transparency

DiscountTaxMargin

Can be

increased

10-80% can be passed on tointermediary or consumer

depending on

competition/buying power

95

19

23

32

42

126

145

168163

174

100

165 5

5

11

Ex -

factory

price

Excise

duty

Freight

and

Octroi

Central

sales

tax

Landed

cost to

ditributor

Distri-

butor

margin

Landed

cost to

retailer

Retailer

margin

MRP Standard

discount

Selling

price

Sales

tax

End

consumer

price

Exempt for

small units

Can be

evaded

Can beincreased

Can beevaded

Unreasonably highMRP to accommodatevarying taxes by state

(Percent) 16 4 4 20 25 12

# Multiple levies create multiple opportunities for evasion# Tax evasion results in flexible margin and discounts# Unreasonably high MRPs lead to lack of price transparency

DiscountTaxMargin

Can be

increased

10-80% can be passed on tointermediary or consumer

depending on

competition/buying power

Source: McKinsey

The only way organised retailers can counter this significant disadvantage is by

dealing with inefficiencies in the supply chain and passing on the benefits of

operational efficiency to consumers.

Unorganised retailers havedistinct advantages overorganised formats



Retail Sector


Supply chain

Core supply chain management (SCM) issues such as month-end sales peaks,

forecasting inaccuracy and constraint-based planning continue to plague Indian

corporates even after ERP implementation. It is worth noting that India

wastes more fruit and vegetables than are consumed in the whole of UK. However, supply chain in India continues to be perceived as a low value added

activity of managing transportation and warehousing.

In order to cater to the fast-changing consumer needs as well as intense

competition in the sector, retailers have to invest in supply chain management.

This highlights the growing importance of supply chain management in

managing stock availability, supplier relationships, new value added services

and cost cutting. We believe organised retailers will have to invest heavily into

logistics management in order to compete effectively with traditional formats.

Thus, it is important for organised retailers to allocate top priority to supply chain

as not just an operational perspective but also from a strategic point of view.

Fragmented suppliers

In most product categories except electronics, FMCG, cosmetics and textiles,

not many producers have the necessary scale and variety to supply to national

retail chains. Small fragmented suppliers have also held back development of

organised retail in India.

Regulatory barriers

The retail industry employs 10-11% of the total employed population in India.

Given this, the sector is politically highly sensitive and there are seriousregulatory barriers to growth that have far reaching implications for organised

retailers. Real estate access is still not easy in most cities and complex

regulations constrain the development of property. Tax regulations, while

considerably streamlined, remain significant and the government still lags in its

efforts to implement a uniform, value-added tax system. Labour and other

regulations constrict retailers’ flexibility to optimise costs. In fact, a favourable

regulatory environment will act as a catalyst for the organised format to thrive.

Supply chain in India is perceived as managing

transportation andwarehousing

Regulatory barriers have farreaching implications for

organised retailers



Retail Sector


Factors hindering growth of organised retail

Factor Description Implications

Barriers to FDI ! FDI not permitted in pure

retailing at present; can

franchise as well as enter intotechnological alliances

! Players can enter wholesale

trade

! Global players absent

! Limited exposure to best

practice skills/technology

Unavailability/high cost

of real estate

! Pro-tenant rent laws

! Restrictive zoning legislation.

! Non-availability of government

land

! Lack of clear ownership titles;

complex sub-letting

arrangements

! Difficult to find appropriate

real estate-location, size-

especially in city centres

! High land costs owing to

constrained supply

! Disorganised nature of

transactions

Complex taxation

system

! Differential sales tax rates

across states! Multiple-point octroi

! Sales tax evasion by smaller

stores

! Added cost and complexity of

distribution

! Cost advantage for smaller

stores through tax evasion

Multiple legislations

e.g. Labour laws

! Stringent labour laws

governing hours of work,

minimum wages payment of

PF

! Multiple licenses/clearances

required from different

agencies

! Limits flexibility in operation -

days stayed open, use of part

time employees

! Irritant value in establishing

chained operations; can add

to costs

Source: McKinsey

Underdeveloped rural markets

More than 70% of India’s population resides in rural areas, and hence,

penetration of the rural market is what big retailers have to concentrate on for

growth. However, rural markets are fragmented and offer no scale economies.

Moreover, these markets are underdeveloped and unable to absorb radical

changes associated with modern formats. Therefore, the addressable market

opportunity is restricted to the urban population, at least till the consuming class

in rural areas adapts to the changed mindset. In addition, there are serious

infrastructure-related problems that hold back development of retail formats in

these regions.

Lack of skilled human capital

In India, the highly educated class does not consider retailing a ‘profession of

choice’. However, as more and more corporates enter the retail space, there is

an increasing need for a more talented pool of human resource. There still

exists a gap between the supply and demand of professionals. Therefore, some

corporates and trusts have set up retail institutes that offer a variety of courses

in retail management for frontline, supervisory and managerial posts. Retaining

human resources is another major challenge for big retailers.

Rural markets are

fragmented and offer noeconomies of scale

Attracting and retaininghuman resources is a majorchallenge for big retailers



Retail Sector


Retail Dynamics & Economics

Retail is a tough business and success is determined by a combination of

various operational factors including store location and size, space utilisation,

store maintenance, inventory management and customer service. The business

is highly capital intensive and location sensitive with low operating profit

margins. Asset turnover is the most critical factor in this business. Hence, one

of the most important parameters for judging the profitability of any store is

sales per square feet – higher the sales per square feet of a retail store, higher

is its asset turnover, and hence profitability.

DYNAMICS OF ORGANISED RETAIL Size drives economies on procurement, and lowers logistics and marketing

costs while delivering better value to customers in terms of lower price, better

quality, greater selection, improved service and in-store ambience. These

factors have enabled retail category leaders to consistently deliver superior

operating and financial performance.

The virtuous cycle

Better

bargaining


Reduces



Increasedconversion

Time to marketCost

Productrange

Value formoney

Highvolume

Increases

Better

bargaining


Reduces



Increasedconversion

Time to marketCost

Productrange

Value formoney

Highvolume

Increases


Location, size & space

utilisation, inventorymanagement and customerservice determine successof a store



Retail Sector


However, a retail store’s operating leverage can become quite lethal if it

stagnates and falls into a vicious cycle of contraction, or if leveraged unwisely.

The vicious cycle

Poorbargaining

Higher numberof intermediaries

Increases

Retailinefficiencies

Lower share of customer basket

Lowerconversion

Time to marketCost

Product

range

Value for

money

Lowvolume

Reduces

Poorbargaining

Higher numberof intermediaries

Increases

Retailinefficiencies

Lower share of customer basket

Lowerconversion

Time to marketCost

Product

range

Value for

money

Lowvolume

Reduces

Source: ENAM

Growth = geographic reach x product range x target customers: The total

market opportunity for any retail chain is a function of three variables, viz.

geographic coverage, product range and the target consumer base. A change

in any of these three variables leads to growth. While an increase in area under

coverage leads to inorganic growth, a change in the other two variables brings

in organic growth through increased share of customers’ shopping basket. For

example, adding alternate categories and extending product offerings increase

a retailer’s share in the customers’ shopping basket.

A change in any of the threevariables leads to growth



Retail Sector


ECONOMICS OF RETAIL How does one measure performance in the retail business? Like other

businesses, there are certain important ratios that need to be reviewed regularly

in retail. An illustrative popular measure peculiar to retailing is the number of

people entering the store, termed in the trade as ‘footfalls’. However, footfalls

alone cannot measure a retail player’s income and profit. For this purpose,

conversion ratio is calculated which is the number of cash memos as a

percentage of the number of footfalls. This is an important measure as it is also

an indication of the success of the store’s merchandise mix.

Finally, the average bill size is assessed to gauge whether a store acts as a

destination for customers’ overall purchases or it is just an impulse purchase

store. The average bill size can also be used to calculate a store’s share in the

total wallet of the customer. We have compiled a sample list that records the

performance of Indian retailers on these parameters.

The Retail ‘Kundali’

Company

No. of

stores

Footfalls

per day

Conversion

(%)

Average bill

size (Rs.)

Turnover - derived

(Rs. m)

General merchandisers

Nalli's 13 2,400 25 1,100 309

Pantaloon 13 1,100 28 900 130

Shoppers’ Stop 9 2,250 28 1,250 255

Meena Bazaar Chain 5 1,800 30 600 58

Westside 4 2,250 35 750 85Big Bazaar 4 4,000 36 580 120

Globus 4 1,650 26 1,150 71

Pyramid 3 1,900 25 1,450 74

Ebony 3 2,000 38 650 53

Akbarally’s 3 800 60 1,000 52

KBN 1 2,250 22 1,500 27

Benzer 1 2,000 50 1,500 54

Destination stores

Monginis 225 975 75 60 355

Subhiksha 132 1650 85 320 2,133FoodWorld 41 NA NA NA 155

Nilgiris 18 3,000 48 150 140

Croissants 18 110 95 150 10

Vitan 17 220 75 300 30

Nanz 12 3000 95 20 25

Planet M 2 3000 50 250 27

Rhythm House 1 1300 60 225 6

Source: Companies, Economic Times, ENAM Research

‘Footfalls’ is an important performance measure inretail

Average bill size is used tocalculate a store’s share ofthe customer’s total wallet



Retail Sector


High operating leverage business

Margins in the retail business are on the lower side compared to other

businesses given its trading nature. Raw material cost accounts for 65-70% of

sales, which is variable in nature. Of the remaining, more than 75% of the

expenses are fixed, and hence, the criticality of high inventory turns. Based onour interaction with industry leaders, we present an economic model of a typical

retail business. It is assumed that the retail business has achieved certain

critical mass.

Economics of a retail store

Income statement % of salesBalance sheet

(40,000 sq. ft store)

Cost

(Rs. m)

% of

total

Per sq.ft

(Rs.)

Gross profit margin 30-32 Building and Civil Work 10-12 13 250

Occupancy cost 7-8 Equipment & air conditioning 20-22 27 525

Employment cost 5-6 Furniture & fittings 22-24 29 575

Power cost 1.5-2 Preliminary & pre-operative expenses 4-5 5 100

Selling & promotion cost 4-5 Working capital 20-24 26 500

Overheads 5-6 Total 76-90 100 1,950

Subtotal 89-92

EBIDTA 8-11

Depreciation 2-3

Interest 2-4

PBT 4-5

Tax 1-1.5

PAT 3-4


Extending this model forward, it can be concluded that any retail store with

similar margins and asset base needs to clock sales of at least Rs.5,200 per

square feet to breakeven.

Breakeven analysis of a retail store

525043753750 6250 7500

Loss

-15m

22.5m

Profit

Sales/ Sq.ft.

525043753750 6250 7500

Loss

-15m

22.5m

Profit

Sales/ Sq.ft.

525043753750 6250 7500

Loss

-15m

22.5m

Profit

Sales/ Sq.ft.


>75% expenses are fixed;hence, high inventory turnsis critical



Retail Sector


Valuations

Organised retail, being an emerging business, is experiencing unprecedented

growth. Lack of any historical record or valuation benchmark in the domestic

industry has led us to draw valuation parallels with other emerging industries.

We believe retail valuations too will chart a course similar to any other

flourishing industry. For the purpose of our exercise, we have modeled Infosys

Technologies and Zee Telefilms as relevant companies given that both

companies belong to industries that have seen extraordinary growth.

Charting future course of valuations

0

300

600

900

1995 1996 1997 1998 1999 2000 2001 2002 2003

0

100

200

300

400

Zee (LHS) Infosys (RHS)

Busienss model still evolving

Business model proven.

High growth phase

Growth slows down

Industry consolidates

Survivors c reate long-term

value, while losers perish


We have also analysed valuation retail majors in North America and Pacific Rim

to figure out the valuations commanded by mature businesses. Although not

strictly comparable to Indian retailers, these valuation bands can certainly betaken as a yardstick.

We have taken two valuation parameters, viz. Price to Book Value and

EV/EBIDTA and have plotted them against return on equity and return on

capital employed respectively. It is clear from the trend line that companies

earning high return on invested capital command high valuations.

Infosys and Zee providerelevant comparison as both

belong to industries thathave grown extraordinarily

Companies with high returnon capital command highvaluations



Retail Sector


Companies with better return on invested capital command higher valuations

Target

Siam

Makro

Mr Max

TJX

Family

dollar

Gap

Shinsegae

Costco

Ross

Wal-Mart

Japan

Ltd Brands

Dollar

general

Nordstrom

-5

0

5

10

15

20

25

30

35

40

45

0 2 4 6 8 10

Price /Book Value (x)

R o E ( % )

Target corpSiam

Makro

Mr Max

TJX

Family

dollar

Gap

Shinsegae

Costco

Ross

Wal-Mart

Japan

Ltd Brands

Dollar

general

Nordstrom

-5

0

5

10

15

20

25

30

35

0 5 10 15 20

EV/EBIDTA (x)

R o C E ( % )

Source: Bloomberg

Similarly, when evaluated on operational parameters, companies with higher

operating profit margin command higher valuations.

Operating performance vs. valuations

Target corp

Siam Makro

Mr Max

TJX Family dollar

Gap

Shinsegae

Costco

Ross

Wal-Mart

Japan

Ltd Brands

Dollar general

Nordstrom

1

2

3

4

5

6

7

8

9

0.0 0.2 0.4 0.6 0.8 1.0 1.2 1.4

Market Capitalisation /Sales (x)

O p e r a t n g m a r g i n ( % )

Source: Bloomberg

Retail companies command valuations in excess of 30x earnings in most

developed economies. The reason for the fancy valuations is the scalability of

the business. The potential to expand and scale is virtually unlimited and

efficiency improves with scale. To get a perspective, let us take Wal-Mart as an

example.

Scalability of the businessensures attractive valuations



Retail Sector


Wal-Mart by numbers

Statistics

New stores opened annually (no.) 420

Sales per hour $22m

Number of employees 1,383,000

Number of suppliers (worldwide) 30,000

SKUs on its web site 600,000

Daily customers 15.7m

Time between each Barbie Sale 2 seconds

Number of employees in China 4,000

Value today of $100 investment made in 1970 $11,500,000

One day sales record (11/23/01) $1.25bn

Source: Company website

In India, few retailers have been able to craft a scalable business model. In the

listed space, both Pantaloon and Trent have scaled up in the last couple of

years. Given the high growth potential within the sector, these companies are

trading at attractive valuations.

Comparative valuations

(Rs. m) Pantaloon Trent

Price (Rs.) 42 154

Shares o/s (m) 17 13

Market cap 727 2,017

Borrowings 1,098 11

Enterprise value 1,785 769

Operating profit margin (%) 8.8 8.5

RoCE 12.2 5.6

RoE 17.7 4.7

Earnings per share (Rs.)

FY02 4.7 6.7

FY03E 5.6 7.1

FY04E 11.3 8.2

CAGR (%) 55.1 10.6

EV to EBIDTA (x) FY04E 3.8 7.8

P/E (x) FY04E 4.0 17.3

Source: Annual Report, ENAM Research



Retail Sector


Recommendation

WORRIES ARE A PART OF EVOLUTIONSome of the concerns investors have on the retail sector (like competition from

unorganised sector, supply chain bottlenecks and regulatory muddle) are

genuine. However, we believe the remaining need to be viewed as more a part

of an industry’s evolution.

Fear #1: “Investments exceeding $200m over the next two years for retail

expansion”. These investments will add over 10m sq. ft of retail space

nationwide. However, fears of huge capex probably need to be moderated by

issues such as growth potential and breakeven economics for the majors.

Fear #2: “High operating leverage business”. Inventory turnover is critical in

this business and incremental volumes add disproportionately to the bottomline.

Economies of scale are significant.

Fear #3: “Regulatory and infrastructural issues could take time”. Although

regulatory and infrastructure issues do exist at the moment, we expect these

issues to be addressed sooner than later with the entry of leading corporate

houses such as the Tatas, Birlas and Rahejas.

Fear #4: “How the overall market will evolve is unclear”. We believe the

domestic retail market would evolve over three phases:Stage I – Rapid geographic expansion. Retailers will seek national or regional

presence in order to grab market share and attain critical mass.

Stage II – Search for competitive equilibrium. The focus will shift from

expansion to consolidation and better operational efficiency. Post stage I,

weaker players would exit and the market would search for potential equilibrium

among survivors in the next phase.

Stage III – Few large retailers would emerge with superior bargaining power,

cost competency and brand equity.

History reveals that all emerging industries pass through four phases at the

market place. In the first phase, valuations soar as the industry is in the high

growth stage. As valuations reach unimaginable heights, sustainability and

scalability issues crop up and valuations take a dip in the mist of all round

pessimism. Then comes the phase of consolidation as companies rethink their

business model and it is unclear as to who would emerge as the leader. In the

final phase, the industry is mature and dominated by a few large corporates.

Valuations once again improve and find new equilibrium.

Given the uncertainty on who would emerge the final winner in the retail space,

we recommend that investors watch the happenings in the space more closelyand start taking bets on this sector. As clarity emerges on the final likely winner,

Huge capex upfront is anecessity in retail

Market, we believe, willevolve over three stages



Retail Sector


relative positions on that company should be increased. At the moment, there

are only two listed, pure retail companies – Pantaloon and Trent. Both these

companies have proven business models and have gained a head start in the

retail space by offering a compelling value proposition to customers. The retail

sector offers lucrative opportunity to investors with a longer-term investmentoutlook. Hence, we recommend a BUY on both Pantaloon and Trent.

India’s retail plays – Where to invest?

Business

Model

Operational

efficiency

Management

Bandwidth

Financial

Strength

Comments

Westside % Entire retail assets are in Trent Ltd.

Retail operation achieved cash

breakeven in FY2002. The company has

Rs.1bn of cash.

% Retail assets in Pantaloon Retail India

Ltd. Has a track record of profitability.

% New business venture of Pantaloon

Retail India Ltd.

Pantaloon

Big Bazaar

% Not listed. Business has achieved

cash breakeven. Strong promoters.

Shoppers

Stop

High Medium Low

Business

Model

Operational

efficiency

Management

Bandwidth

Financial

Strength

Comments

Westside % Entire retail assets are in Trent Ltd.

Retail operation achieved cash

breakeven in FY2002. The company has

Rs.1bn of cash.

% Retail assets in Pantaloon Retail India

Ltd. Has a track record of profitability.

% New business venture of Pantaloon

Retail India Ltd.

Pantaloon

Big Bazaar

% Not listed. Business has achieved

cash breakeven. Strong promoters.

Shoppers

Stop

High Medium Low




Retail Sector


Sam Walton’s 10 rules for building a business

Rule 1: Commit to your business. Believe in it more than anybody else. I think I overcame every single one of my

personal shortcomings by the sheer passion I brought to my work. I don't know if you're born with this kind of passion,

or if you can learn it. But I do know you need it. If you love your work, you'll be out there every day trying to do it the

best you possibly can, and pretty soon everybody around will catch the passion from you - like a fever.

Rule 2: Share your profits with all your Associates, and treat them as partners. In turn, they will treat you as a partner,

and together you will all perform beyond your wildest expectations. Remain a corporation and retain control if you

like, but behave as a servant leader in a partnership. Encourage your Associates to hold a stake in the company.

Offer discounted stock, and grant them stock for their retirement. It's the single best thing we ever did.

Rule 3: Motivate your partners. Money and ownership alone aren't enough. Constantly, day-by-day, think of new and

more interesting ways to motivate and challenge your partners. Set high goals, encourage competition, and then

keep score. Make bets with outrageous payoffs. If things get stale, cross-pollinate; have managers switch jobs with

one another to stay challenged. Keep everybody guessing as to what your next trick is going to be. Don't become too

predictable.

Rule 4: Communicate everything you possibly can to your partners. The more they know, the more they'll

understand. The more they understand, the more they'll care. Once they care, there's no stopping them. If you don't

trust your Associates to know what's going on, they'll know you don't really consider them partners. Information is

power, and the gain you get from empowering your Associates more than offsets the risk of informing your

competitors.

Rule 5: Appreciate everything your Associates do for the business. A paycheck and a stock option will buy one kind

of loyalty. But all of us like to be told how much somebody appreciates what we do for them. We like to hear it often,

and especially when we have done something we're really proud of. Nothing else can quite substitute for a few well-

chosen, well-timed, sincere words of praise. They're absolutely free - and worth a fortune.

Rule 6: Celebrate your successes. Find some humor in your failures. Don't take yourself so seriously. Loosen up, andeverybody around you will loosen up. Have fun. Show enthusiasm - always. When all else fails, put on a costume and

sing a silly song. Then make everybody else sing with you. Don't do a hula on Wall Street. It's been done. Think up

your own stunt. All of this is more important, and more fun, than you think, and it really fools the competition. "Why

should we take those cornballs at Wal-Mart seriously?"

Rule 7: Listen to everyone in your company. And figure out ways to get them talking. The folks on the front lines - the

ones who actually talk to the customer - are the only ones who really know what's going on out there. You'd better

find out what they know. This really is what total quality is all about. To push responsibility down in your organization,

and to force good ideas to bubble up within it, you must listen to what your Associates are trying to tell you.

Rule 8: Exceed your customers' expectations. If you do, they'll come back over and over. Give them what they want -

and a little more. Let them know you appreciate them. Make good on all your mistakes, and don't make excuses -apologize. Stand behind everything you do. The two most important words I ever wrote were on that first Wal-Mart

sign, "Satisfaction Guaranteed." They're still up there, and they have made all the difference.

Rule 9: Control your expenses better than your competition. This is where you can always find the competitive

advantage. For 25 years running - long before Wal-Mart was known as the nation's largest retailer - we ranked No. 1

in our industry for the lowest ratio of expenses to sales. You can make a lot of different mistakes and still recover if

you run an efficient operation. Or you can be brilliant and still go out of business if you're too inefficient.

Rule 10: Swim upstream. Go the other way. Ignore the conventional wisdom. If everybody else is doing it one way,

there's a good chance you can find your niche by going in exactly the opposite direction. But be prepared for a lot of

folks to wave you down and tell you you're headed the wrong way. I guess in all my years, what I heard more often

than anything was: a town of less than 50,000 population cannot support a discount store for very long.



Retail Sector


This page is intentionally left blank.



Retail Sector


Companies Sections



ENAM Se c u rit ie sIndia

Pantaloon Retail Rs.42

First mover advantage


C O

M

P A N Y

R E P O

R T

Stock data

Equity capital : Rs.173.2m

Market cap : Rs.850m

52 week high / low : Rs.72 / Rs.17

Avg. daily vol. (6mth) : 29,000 shares

Bloomberg code : PF IN

Reuters code : PART.BO

Shareholding (%)

Promoters : 49.5

Banks & FIs : 15.5FIIs & OCBs : 2. 3

Public : 32.7

Stock price vs P/E

0

20

40

60

80

00 01 02 03 04

0

4

8

12

16

Share price (LHS)

PE (RHS)

(Rs.) (x)

E E

Source: CMIE

! Pantaloon Retail India Ltd is a leading organised retailer

operating multiple formats across India. These formats address

the latent demands of middle-income households.

! The initial success of its business model has encouraged the

management to ramp up operations by entering new markets.

Being a high fixed overheads business, incremental growth

would bring about exponential growth in RoCE.

! The company has embarked upon an aggressive rollout plan

that entails huge capital expenditure not supported by its

balance sheet (debt to equity is 2x).

! The promoters can be credited with the ability to consistently

anticipate industry trends and stay ahead in the business. In our

view, this attribute would be a key differentiator in the long run.

Also, the management is actively addressing past investor

concerns on corporate governance issues.

! We believe the opportunity outplays these concerns, makingrisk to reward very attractive. The stock trades at 4x FY04E

earnings. We recommend a BUY on the stock.

RoE vs P/E Valuation matrix

0

10

20

30

2000 2001 2002 2003 2004

0

5

10

15

20

RoE (LHS) PE (RHS)

(%) (x)

E E0

5

10

15


Fundamentals

Strong

P/E (x)

Financial summary

Y/E Mar

PAT

(Rs. m)

EPS

(Rs.)

Change

YoY (%)

P/E

(x)

RoE

(%)

RoCE

(%)

EV/EBIDTA

(x)

DPS

(Rs.)

2001 73 5.5 - 8.2 19.7 13.4 7.8 -

2002 81 4.7 (15.5) 9.7 17.7 12.2 7.4 -

2003E 97 5.6 20.0 8.0 16.4 15.2 5.4 -2004E 196 11.3 102.5 4.0 26.9 21.7 3.5 1.3


Y



Tel: 9122 5631 1040



Pantaloon


Investment Case

Pantaloon Retail India Ltd (PRIL) is a leading multi-format Indian retail chain

with total sales of over Rs.2.8bn. It owns and operates a chain of 13

departmental stores and 4 discount stores in India (Pantaloon and Big Bazaar

respectively) covering over 350,000 sq. ft of retail space.

Pantaloon is a vertically integrated private label apparel store addressing the

needs of the entire family. Some of its popular women’s brands are: Annabelle

(western office/ casual wear), Srishti (ethnic wear) and Bare (casual wear for

children/ men/ women). In men’s wear, John Miller (formal wear), Ajile (sports

wear) and Scottsville (winter wear) are well-known national brands.

Big Bazaar is a large hypermarket format with store size ranging from 30,000-

50,000 sq. ft, selling everything from home needs, utensils, luggage, white

goods, electronics, cosmetics, jewellery, pharmacy, optician to grocery items at

a discount. These stores are targeted at the middle and lower middle class

population having a high propensity to switch stores on the basis of price. By

expanding into alternate product categories, PRIL has captured more than 70%

of the consumers’ shopping basket as against 8% in 1994.

To offer a compelling value proposition to customers, PRIL has built a centrally

decentralised organisation. While most of the sourcing is done at the corporate

level to derive economies of scale, part of it is decentralised to cater to regional

preferences. PRIL has also adopted the ‘Lefung model’ of sourcing where

consolidators procure goods from suppliers on behalf of the company.

Consolidators come into the picture when goods need to be procured from a

number of small-scale manufacturers. On the operational front, PRIL has

invested heavily in creating a strong support team. It has institutionalised the

concept of category management, design and visual merchandising, and the

inverted pyramid organisational structure.

STRATEGY: TO BUILD CRITICAL MASSIn retail, incremental RoCE grows disproportionately with size. Hence, it is

important to build critical mass to become economically viable. By entering new

product categories and targeting consumers across all price points, PRIL has

crafted a convincing business model to propel organic growth. The initial

success of its business model has encouraged PRIL to scale up operations by

entering new locations. It plans to more than double its retail space to 1m sq. ft

by 2005 with a capital expenditure of Rs.900m.

A leading multi-format Indian

retail chain with total salesof over Rs.2.8bn

Pantaloon is a vertically

integrated private labelapparel store

Big Bazaar is targeted atcustomers with high

propensity to switch storeson price

It is important to build criticalmass to becomeeconomically viable

in retail



Pantaloon


Roll out plan for the next two years

Pantaloons Big Bazaar

Location Area (sq. ft) Location Area (sq. ft)

13 locations 199,300 4 locations 170,000

Proposed

Phoenix Mills - Mumbai 50,000 Mulund-Mumbai 50,000

Bangalore 90,000 Bhuvneshwar 40,000

Surat 30,000 Gurgaon 50,000

Kolkata-II 70,000

Pune 50,000

Western sub-Mumbai 50,000

Ahmedabad 50,000

Source: Company

MANAGEMENT EVALUATION Incorporated in 1987 under the stewardship of Mr. Kishore Biyani, PRIL has

emerged as one of the leading organised retailers of India. The promoters havethe distinction of consistently anticipating industry trends. The management has

successfully adapted and aligned its business with changing needs and

preferences of consumers.

However, we would like to caution investors that there have been accounting

and corporate governance issues in the past. The management is actively

addressing these concerns by divesting / merging group businesses.

CONCERNS As of June 2002, working capital to sales ratio stood at 30%. PRIL carried 115

days of inventory and 23 days of debtors. Stocking inventory before the launchof Big Bazaar in Mumbai and scheduling problems with group companies

resulted in low inventory turns.

PRIL has substantially leveraged its balance sheet (debt-equity of more than

2x). In view of such aggressive growth plans and a highly leveraged balance

sheet, there exist concerns on the financial front. In our view, the company has

over-committed resources and would need capital infusion if it were to scale up

as planned. Aggressive growth could also put pressure on the supply chain.

INVESTMENT ARGUMENT Given the complexity of the retail business, few players in India have a provenbusiness model and track record of profitability. PRIL has a proven business

model offering compelling value proposition to buyers. It is structurally well

placed to capitalise on the emerging opportunity within this sector.

In our view, value migration for any retailer will happen in three phases. In the

first phase, the retailer establishes a robust business model. In the second

phase, the organisation needs to prove scalability. In the final phase, the

organisation has to institutionalise systems and procedures, and adopt

international best practices. PRIL is in the second phase of value migration.

We believe the opportunity outplays concerns, making risk to reward very

attractive. At CMP, the stock trades at 4x FY04E earnings. We recommend a

BUY on the stock.

The management has

adapted and aligned itsbusiness with changingconsumer preferences

In view of aggressive growth plans and highly leveragedbalance sheet, there exist

financial concerns

PRIL is structurally well placed to capitalise on theemerging business

opportunity



Pantaloon


COMPANY FINANCIALS Income statement (Rs. m)

Y/E June FY01 FY02 FY03E FY04E

Net sales 1,764 2,691 4,061 5,903

Other opg. income 10 70 77 84

Total income 1,774 2,760 4,137 5,987

Cost of goods sold 1,415 2,198 3,314 4,818

Contribution (%) 20.2 20.4 19.9 19.5

Advt/Sales/Dist.O/H 89 132 165 228

Operating profit 161 244 375 549

Other income 3 2 2 3

EBITDA 164 246 377 551

Depreciation 18 43 76 107

Interest 65 115 181 170

Pre-tax profit 81 88 120 274

Tax provision 5 5 21 76

Profit after tax 76 83 99 198

E/o income / (Exp.) (11) (10) 0 0

Assumptions

Pantaloon sales 1,025 1,304 1,737 2,119

Big bazar sales 0 430 1,558 3,172

Balance sheet (Rs. m)


Total assets 1,057 1,638 1,962 2,035

Gross block 412 777 1,272 1,543

Net fixed assets 360 683 1,103 1,268

CWIP 79 63 95 75Investments 51 51 51 51

Wkg. cap. (excl cash) 536 795 665 581

Cash / Bank balance 24 40 40 53

Capital employed 1,057 1,638 1,962 2,035

Equity capital 133 173 173 173

Reserves 227 367 468 640

Borrowings 696 1,098 1,322 1,222

Key ratios (%)


Sales growth - 52.5 50.9 45.4

OPM 9.1 8.8 9.1 9.2

Oper. profit growth 51.8 53.8 46.4

COGS / Net sales 79.8 79.6 80.1 80.5

Overheads/Net sales 11.2 11.5 10.8 10.4

Depreciation / G. block 4.3 5.6 6.0 6.9

Effective interest rate 9.3 10.4 13.7 13.9

Net W.c / Net sales (x) 30.4 29.6 16.4 9.8

Net sales /Gr. block (x) 4.3 3.6 3.3 3.9

Incremental RoCE - 14.6 40.4 239.0

RoCE 13.4 12.2 15.2 21.7

Debt / equity (x) 1.9 2.0 2.1 1.5

Effective tax rate 5.8 5.7 18.0 28.0

RoE 19.7 17.7 16.4 26.9

Payout ratio (Div/NP) 0.0 0.0 0.0 11.7

EPS (Rs.) 5.5 4.7 5.6 11.3

EPS Growth - (16) 20.0 102.5

CEPS (Rs.) 68.3 71.6 99.7 174.9

DPS (Rs.) 0.0 0.0 0.0 1.3

Cash-flow statement (Rs. m)


Sources 498 665 436 220

Opening cash 23 24 40 40

Retained earnings 81 114 173 280

Equity issue 8 40 0 0Premium A/c 33 86 0 0

Borrowings 353 402 223 (100)

Applications 498 665 436 220

Capital expenditure 180 349 527 251

Investments 50 0 0 0

Inc in W.Cap 244 276 (130) (84)

Closing cash 24 40 40 53




ENAM Se c u rit ie sIndia

Trent Rs.154

Right financial and business mix


C O

M

P A N Y

R E P O

R T

Stock data

Equity capital : Rs.131m

Market cap : Rs.2,021m

52 week high / low : Rs.188/ Rs.64

Avg. daily vol. (6mth) : 26,000 shares

Bloomberg code : LAKME IN

Reuters code : TREN.BO

Shareholding (%)

Promoters : 26.5

Banks & FIs : 10.8FIIs & OCBs : 3.9

Public : 58.8

Stock price vs P/E

0

50

100

150

200

00 01 02 03 04

5

10

15

20

25

30

Share price (LHS)

PE (RHS)

(Rs.) (x)

E E

Source: CMIE

! Trent is a private label retailer selling a host of contemporary

fashion products through its retail chain Westside. The 9

Westside stores across India promise international shopping

experience for the entire family at an affordable price.

! Trent plans to aggressively ramp up operations by rolling out 3-

4 stores a year. It is also contemplating entering food retailing

to tap a higher share of the customers’ shopping basket. With

close to Rs.1bn of cash and liquid investments, Trent has nofinancial limitation to growth.

! Trent is one of the more efficient apparel retailers with inventory

turnover of 6x. Superior operational efficiency has allowed the

company to offer a better value proposition to customers,

thereby creating a competitive advantage.

! The management has demonstrated superior execution

capability in the apparel business. Although food retail entails

different business dynamics, we believe the management has

the necessary bandwidth to succeed in this business.

! Scalable business model, proven operational competency and

strong balance sheet make the stock attractive. BUY

RoE vs P/E Valuation matrix

4.0

4.4

4.8

5.2

5.6

6.0

2000 2001 2002 2003 2004

5

10

15

20

25

30

RoE (LHS) PE (RHS)

(%) (x)

E E10

15

20

25


fundamentals

Strong

P/E (x)

Financial summary

Y/E Mar

PAT

(Rs. m)

EPS

(Rs.)

Change

YoY (%)

P/E

(x)

RoE

(%)

RoCE

(%)

EV/EBIDTA

(x)

DPS

(Rs.)

2001 87 6.6 – 10.6 4.7 5.6 5.5 6.6

2002 89 6.7 2.2 22.8 4.7 5.6 10.4 5.0

2003E 101 7.7 13.6 20.1 5.3 6.4 9.2 5.0

2004E 117 8.9 16.4 17.3 6.0 7.4 7.8 5.0




Tel: 9122 5631 1040 Y



Trent


Investment Case

Trent Ltd (Trent) – formerly known as Lakme – received its present name after it

amalgamated with Littlewoods International (India) in July 1998. After hiving off

its cosmetics business to Hindustan Lever in 1997, Trent aggressively

expanded its retail operations through the chain of Westside departmental

stores.

THE USPWestside’s USP is to provide an international shopping experience at affordable

prices. The stores offer a balanced mix of high quality, contemporary designs

and a plethora of affordable products to create this ultimate shopping

experience. Each store has several departments to meet the varied shopping

needs of customers, which include men’s wear, women’s wear, lingerie, kids’

wear, household accessories, cosmetics and perfumes. Complementing the

shopping ambience, each retail outlet also houses a coffee shop Cafe West

managed by the Taj Group.

Trent has taken several new initiatives (such as introducing product extensions)

to improve its range of offerings. Further, the company has launched a

customer loyalty programme called ‘Club West’ to ‘lock-in’ customers. The

programme has been highly successful and has 80,000 members till date.

THE DRIVERS Having proven its business model with 9 stores across India, Trent plans to

aggressively ramp up operations by rolling out 3-4 stores each year. Three new

stores are planned in Nagpur, Ahmedabad and Mumbai in the current year,

which would take the total number of stores to 12.

Another significant growth driver for the company would be its foray into food

retailing. Food and grocery is the single largest category in retail with estimated

total sales of Rs.4,500bn. The top 7 metros, where the supply chain is fairlydeveloped, have an 8% market share. The delivery platform for this business

has been finalised after extensive research and rollout is expected in the next 3-

6 months.

THE COMPETITIVE EDGE Trent has two major competitive advantages, i.e. a strong balance sheet and

superior operating efficiency. The company had close to Rs.1bn in cash and

liquid investments as on 31 March 2002. In a capital-intensive business

experiencing unprecedented growth, a strong balance sheet promotes

scalability.

Trent forayed into retailthrough its chain ofWestside stores

The stores offer a balancedmix of contemporary

designs and affordable products

Rollout of new stores and

foray in to food retailing arekey growth drivers

Strong balance sheet and

superior operating efficiency provide competitive edge



Trent


Trent also scores well on operational parameters. This is reflected in its

excellent working capital management. As on 31 March 2002, Trent carried 63

days of inventory and 10 days of debtors. But for the delayed launch of the New

Delhi store, the inventory levels would have been still lower. Trent’s operating

efficiency can be favourably compared with the best in the world.

Operational competence

Companies Inventory days Debtor days

Gap Inc 67 3

Limited Brands 63 3

Ross Stores Inc 104 2

Nordstrom Inc 89 8

Abercrombie & Fitch Co 52 5

Chico's Fas Inc 63 2

Talbots Inc 79 34Trent 63 10

Source: Bloomberg, ENAM Research

Trent’s ability to efficiently manage its supply chain makes it conspicuous when

compared to domestic peers. The company expects to further improve

distribution efficiency by relocation of warehouse and better utilisation of

existing infrastructure. This edge over competitors will fuel growth as Trent

enters the virtuous retail cycle.

CONCERNSTrent is contemplating a foray into food retailing. The dynamics of food retail are

completely different from those of apparel retailing, and hence, there exist

implementation and execution risks in the project.

Just as it took 8 stores for Trent to breakeven, this new venture would also need

a certain scale to start making money. Thus, profitability could be impacted in

the interim.

INVESTMENT ARGUMENT

Trent has successfully rolled out 9 stores across India and has achieved cashbreakeven. Foray into food retailing would provide further scalability to the

business model. Given its financial resources and operational capability to

support the growth momentum, we expect profitability to improve in the coming

years.

At CMP, the stock trades 17.8x FY04E earnings. We expect valuations to

improve as execution risks in the new venture get addressed and business

demonstrates scalability. BUY

Trent’s operating efficiencycan be benchmarkedagainst the best in the world

There exist implementation

and execution risks in thefood retailing project



Trent


COMPANY FINANCIALS Income statement (Rs. m)

Y/E March FY01 FY02 FY03E FY04E

Net sales 490 811 1,135 1,702

Other operating income 3 16 18 21

Total income 493 826 1,153 1,723

Cost of goods sold 296 447 543 811

Contribution (%) 39.9 45.9 47.1 47.1

Advt/Sales/Distrn O/H 227 311 435 663

Operating profit (30) 69 99 138

Other income 140 61 53 45

EBITDA 110 130 152 183 Depreciation 20 24 31 39

Interest 2.9 5.3 1 1.308

Pre-tax profit 87 101 120 143

Tax provision 0 12 19 26

Profit after tax 87 89 101 117

E/o income / (Expense) 15 14 0 0

Balance sheet (Rs. m)


Total assets 1,909 1,879 1,914 1,965

Gross block 349 423 561 701

Net fixed assets 279 330 436 536

CWIP 14 18 - 0

Investments 1,043 1,258 1,058 898

Wkg. cap. (excl cash) 519 220 358 460

Cash / Bank balance 54 54 62 70

Capital employed 1,909 1,879 1,914 1,965

Equity capital 131 131 131 131

Reserves 1,767 1,737 1,772 1,823

Borrowings 11 11 11 11

Key ratios (%)


Sales growth 0.0 65.5 40.0 50.0

OPM (6.1) 8.3 8.6 8.0

Oper. profit growth 0.0 127.7 44.1 39.1

COGS / Net sales 60.5 55.1 47.8 47.7

Overheads/Net sales 46.3 38.3 38.3 39.0

Depreciation / G. block 5.8 5.6 5.6 5.6

Effective interest rate 26.4 48.6 12.0 12.0

Net wkg.cap/ Net sales 106.0 27.1 31.6 27.0

Net sales / Gross block 1.4 1.9 2.0 2.4

Incremental RoCE 0.0 (55.1) 43.1 44.8

RoCE 5.6 5.6 6.4 7.4

Debt / equity (x) 0.0 0.0 0.0 0.0

Effective tax rate 0.2 12.0 16.0 18.0

RoE 4.7 4.7 5.3 6.0

Payout ratio (Div/NP) 100.1 74.1 65.3 56.1

EPS (Rs.) 6.6 6.7 7.7 8.9

EPS Growth - 2.2 13.6 16.4

CEPS (Rs.) 8.1 8.6 10.1 11.9

DPS (Rs.) 6.6 5.0 5.0 5.0

Cash-flow statement (Rs. m)


Sources 76 114 120 145

Opening cash 48 54 54 55

Retained earnings 35 60 66 91

Equity issue 0 0 0 0

Premium A/c 0 0 0 0

Borrowings (7) (0) 0 0

Applications 72 114 113 135

Capital expenditure 39 79 120 140

Investments (286) 215 (200) (160)

Inc in W.Cap 265 (234) 138 102

Closing cash 54 54 55 53




Trent


NOTES



Trent

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retail sector - 12 november 2002 sr

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