September 24, 2005

A Few thoughts on indian retail industry

I was going through a report on the Retail industry specifically the Lifestyle / Garment (Non – Food sector).

Key points and my thoughts

· There are about three main publicly listed companies – Pantaloon, Trent, and Shopper’s stop
· All companies showing rapid growth (50 %+) and expected to show it for the next 2-3 (or more) years due to new stores being opened and share of organized retail rising ( current 3-4 % may go up to 7-8 %)
· All companies have raised debt or equity to fund expansion . In addition all the three do not have excessive debt and should be able to grow easily

· Margins are competitive ( 7-10 % OPM) and Net margins in the 3-4 %. For companies which have higher % of in-store brand , the margins are higher.
· New formats coming up such as central from Pantaloon ( A form of Superstore), Big bazaar (For groceries etc ) which have been fairly successful. Other companies in the space are also expanding through similar formats ( Trent has launched its hypermarket – Star India bazaar )


Strong growth in the sector due demographic changes in India ( Young middle class is now shopping more in such places)
A few successful formats are coming up which are driving growth
Development of organized retail will improve / streamline supply chain and help in developing the sector further


· Competitive advantages depend on economies of scale / Brand and location advantages. Companies like Pantaloon if they can achieve scale would be able derive these advantages and face foreign competition. Companies which do not scale up or develop a niche will have a tough time facing foreign competition

· Foreign competition – Walmart / Carrefour are expected to enter the market. Their huge expertise and deep pockets cannot be matched by Indian players. Also reliance and other large industrial houses may enter the sector (Will the existing players get wiped out or relegated to niches ?)

· Valuation – Currently all the companies are trading at PE of 40-50 which reflect the opportunities ahead. But somehow the market is not considering the risks to these companies from expected competition

An important sector to follow, but not worth investing now as there is no margin of safety in the valuations (which reflect great times ahead, but no risks at all)

No comments: