 Sector Overview

 Shoppers Stop Ltd.

 V-Mart Retail Ltd.

March 27, 2017

Research Analyst:
Abhishek Roy
Email: abhishek.roy@smifs.com1
Retail Sector: Overview
Indian Retail Sector is one of the most dynamic sector in the world valuing at USD672 billion. Globally, India ranks fifth in
terms of market size which is growing at a rate of 12% per annum. Indian Retail market can be classified into two
categories. Retail Market Penetration
Organized
-Organized Retail, where traders and retailers are licensed for trading activities and are registered to pay taxes to the
9%
government .
- Unorganized Retail consists of formidable mix of conventional Kirana shops, general stores, mom-&-pop stores, corner
shops and other small retail outlets.

Organized retail market is currently valued at USD60 billion, merely 9% of the sector, where as Unorganized retail market
holds the rest. India's organized retail penetration is much lower compared with other countries, such as the United
Unorganized
States which have Organized retail sector penetration of 85%. Food & Beverage holds around 70% of the Retail sector,
91%
followed by Apparel and Personal Care. As per World Bank's World Development Indicators database published on
February 01, 2017, India is the 3rd largest economy in the world in terms of Purchasing Power Parity (PPP), only behind
China and US. Indian GDP growth stood at 7% as on December 31, 2016 as mentioned by Central Statistics Office (CSO)
and it is expected to be the same for FY2017. As per IMF, Indian economy is likely to grow by 7.2% in FY2018 and 7.7% in
FY2019. This shows India's growth potential in Organized Retail Penetration also. Healthy economic growth, changing
Source: Company, SMIFS Research
demographic profile, increasing disposable incomes, changing tastes and preferences are the main growth drivers in the
organized retail market in India.

Over the past few years, many prominent players in the country like Tata, Birla, Reliance, and many others are investing
significantly in the Indian Retail market as a result of which there has been a tremendous growth in the organized segment.
Many other ambitious players stepped into the arena with long term goals to expand their business across verticals, cities,
formats and segments.

Organized Retail Penetration (ORP) With the stellar listing debut on March 21, 2017, Avenue Supermart (Dmart) commands a market capitalization of over INR40000
% in terms of total crore, which is more than the combined market cap of most leading peers, including ABFRL, Future Retail, Trent, Shopper’s Stop,
Retail Category market 2014-15 ORP (%)
V-Mart and V2 Retail. The high premium given to the stock is the result of strong balance sheet, credible management and
Food & Beverage 69-70 2-3 differential profits generating model of the Company. However, Value Creation post listing of DMart is an eye-opener to some of
Clothing & Textile 11-13 17-20 the established brands in the country to emphasis on their modus-operandi and their balance sheets. We strongly believe that
Consumer Durables 4-5 15-20 some of the leading players in the retail space in India like, Shoppers Stop, V Mart, Trent, Future Retail is likely to re-rated on
Home Décor & Furnishing 3 5-6 several individual parameters. India's large retail market holds robust opportunities in the organized market. Also, there is
Beauty, Personal Care 8-11 6-10 opportunity for the entrants of new players with strong focus and ambition in the sector. Existing players can increase their hold
Footwear 2 16-17 by carrying out expansion plans, augment infrastructure development and bringing in new categories.
Others (Pharmacy,
Stationery, etc) 3-4 9-30 With triumphant victory in UP assembly election, NDA led government is now expected to act swiftly to ease FDI norms in the
multi-brand retail sector. The retail sector employs a large number of people after agriculture and textile. With the governments
Source: IBEF, SMIFS Research
manifesto to encourage employment growth, FDI in multi-brand retail sector will be a keen element to drive job creation.
Government may allow a major overhaul of the FDI in multi-brand retail if the foreign retailers sells goods with label ‘Made In
India’. This will help in generating employment which in turn will help in change in lifestyle and rise in disposable incomes.

2
 Retail Sector: Peer Comparison

Source: Company Website, SMIFS Research

Note:

1. As a part of the scheme of arrangement between erstwhile Future Retail Limited and Bharti Retail Limited, Future Enterprises Limited was created with combined retail backend and infrastructure of both these companies to support the retail front
end.

2. Future Consumer Ltd products presence across leading organized retailers with an overall footprint of approx. 29000 stores including Future Group stores (Big Bazaar-58%, Nilgiris-10%, Aadhaar-4%, EasyDay-10%, GT, MT & Other-19%)

3. Market Cap taken is on March 21, 2017 and Mrkt Cap/Sales calculated to FY2016 sales

4. Avg Sales/Sq. ft is calculated based on the recent number of stores with FY2016 Financials

5. Consolidated Financial numbers are taken for DMart, Shoppers Stop, Trent, Future Consumer, and Future Enterprise, where as Standalone Financial numbers are taken for ABFRL, ABRL, Future Retail, Reliance Retail, Spencer, V-Mart and V2 Retail
3
Shoppers Stop
Retail
Market Data (As on March 24, 2017) Brief Overview
Current market price (INR): 343.80
Shoppers Stop Ltd is one of the leading players in the retail segment. Shoppers Stop and its associate companies are involved in retailing through
Target Price: 474.00 department stores, specialty stores, entertainment zones and large hypermarkets operating in about 60 lacs sq ft in the country.
Upside (%) 38.00
Investment Rationales
52 Week High/Low: 406.40/268.00
To shut or relocate unprofitable stores
Market Capitalization (In INR-Cr) 2870.89 Shoppers Stop will shut or relocate unprofitable outlets and redesign some to encourage growth by attracting young consumers who moved to its peers or online. As per
Recommendation BUY Management, eight old stores will go under redesigning. Cost cutting itself should lead to about 50-60 basis point gain which will help Shoppers Stop aiming to grow sales by 15%
and profit by 50% next fiscal.

Shareholding Pattern (As on December 31, 2016) Brand Campaign-a necessary to drive sales
The Company hadn't created a brand campaign in the last 24 months. The Management is planning to invest heavily in brand campaigns and marketing. The Company is planning
to launch a new brand campaign with the beginning of next fiscal specific to various categories.

Focus on youth-oriented brands

The Company is also planning to drive sales through private and exclusive brands by making them more relevant to the youth. Private brands contribute 11.5% of sales, where as
Exclusive brands contribute 4.1%. The Company will bring in younger brands which will differentiate younger customers. Some of exclusive brands include Wrogn by Virat Kohli,
Imara by Shraddha Kapoor, Desigual the Spanish fast fashion.

Shoppers Stop Omni-channel project to complete by 2017-18

Shoppers Stop is likely to complete the implementation of INR60crore Omni-channel project by next fiscal which will help them to sell products through offline channels like
physical stores and online channels through e-tailers and own site. The Company has already rolled out the first phase and is looking to implement the next phase by September
FY18. For the same, Shoppers Stop partnered with Riversand for its Master Data Management (MDM) solution. Riversand's MDMCenter will create end-to end value to Shoppers
Stop to strengthen its omni-channel and a 360 degree view of a customer's entire relationship cycle and interactions which will help Shoppers Stop with tremendous amounts of
rich insights.

Stock Scan HyperCity- A savior to drive margins

HyperCity Retail (India) Ltd, a retail subsidiary of Shoppers Stop Ltd. contributed 21% of total revenue in 9MFY2017 against 20% for the same period last year. The Company has
BSE Code 532638
brought in experts in each departments to strengthen the team and strengthening infrastructures in the stores. Fundamentally, they are targeting for double digit top line growth
NSE Code SHOPERSTOP for LTL basis. Any improvement in consumer demand contributing higher revenue growth in HyperCity will be a key factor for Shoppers Stop to register higher margins.

Bloomberg Ticker SHOP IN Recommendations

We believe that the strong foothold of the Company in retail sector would help in redefining its business strategy and create value to shareholders. Currently, the Company trades
Reuters Tickers SHOP.BO
at Market Cap to FY2016 Sales of 0.62x where as most other players trade at higher MCap/Sales based on the same period. We believe the Company is undervalued and we assign
Face Value (INR) 5.00 a MCap/Sales of 1x to the Company and arrive to a projected target price of INR474.

Diluted EPS FY16 (INR) -95.18

Exhibit: Shoppers Stop Ltd.-Financial Performance at a glance (Consolidated)
Current P/E 1395.99
Particulars (INR Cr) FY 2014A FY 2015A FY 2016A FY 2017E FY 2018E FY 2019E
Average P/E 347.23
Net Sales 3706.01 4200.00 4464.50 5272.80 5863.10 6547.30
Beta vs Sensex 0.71
Growth (%) 18.82 13.33 6.30 18.11 11.20 11.67
Debt/Equity 1.63 EBITDA 133.25 268.01 198.17 191.30 278.00 361.70
Average Daily Volumes 29967 EBITDA Margins (%) 3.60 6.38 4.44 3.63 4.74 5.52
Net Profit -50.33 49.01 -43.47 1.64 38.30 73.82
Stock Return Vs. Nifty Return Chart Net Profit Margins (%) -1.36 1.17 -0.97 0.03 0.65 1.13
Net Profit Growth (%) 7.28 197.38 -188.7 103.77 2235.37 92.74
EPS -0.99 5.09 0.25 0.41 4.51 8.84
BVPS 58.96 63.38 62.92 60.72 61.85 66.90
P/E 0.00 80.52 1486.34 838.54 75.21 39.68
P/BV 6.53 6.46 5.79 5.66 5.56 5.24
EV/EBITDA 23.02 13.24 15.79 19.44 13.38 10.43
ROE (%) -10.15 9.62 -8.25 -3.13 5.37 12.48
Source: Ace Equity, Bloomberg and SMIFS Research 4
V-Mart Retail
Retail
Market Data (As on March 24, 2017) Brief Overview
Current market price (INR): 741.65
V-Mart, incorporated in 2002, is a medium-sized multi-brand family store which provides true value for money to its customers. It offer a great shopping
Target Price: 1050.00 experience to its customers offering a vast range of products including clothes, accessories, luggage, cosmetics, toys, games, etc. under one roof.
Upside (%) 41.00

52 Week High/Low: 883.00/440.00 Investment Rationales

Market Capitalization (In INR-Cr)
Recommendation
Shareholding Pattern (As on December 31, 2016)
1340.03
Strengthening its Presence
BUY The Company is aggressive in strengthening its presence by opening new stores. As on March 31, 2016, the company had 123 stores, where as, the store count reached 140 as on
March 07, 2017. The Management have similar plans of opening over 20 stores in the next year . The Company is focusing on tier II and tier III cities, where as, its peers are focused
on metropolitan and tier I cities.
Improvement in Working Capital Management
The Company had good improvement in working capital management by 3-4% compared to the same period last year. This was backed by improvement in inventory days
contributed by better sales and also better management on account of supply chain and merchandizing team.

Better Operating margins compared to its peers

As on March 31, 2016, the Company's Operating Margin stood at 7.69%, where as, its peers Future Retail Ltd and Trent Ltd are operating at margins of 1.18% and 5.56%
respectively. Margins outperformance was backed by lower overheads, lower rentals and advertising costs. Also, the Company have better return ratios against its peers as strong
operating margins helped in healthy ROE averaging 17.52% over the past 5 years against Future Retail's 0.4% and Trent's 1.2%.

Zero Debt Theory

The sector V-mart is in, requires intensive working capital. But the Company believes on the theory that the most profitable company is the one with most efficient working capital
use. The Company does not mobilize any long term debt for funding store expansion. As a matter of policy, all capital expenditure is funded by internal accruals. The Company
takes working capitals from banks to fund inventory only.

Stock Scan Recommendations

The Company’s Top line & Bottom line are growing at a CAGR of 30% and 26% respectively over the last 5 years. With the Company’s zero debt and better return ratios compared
BSE Code 534976 to its peers, and its ambitious plan for expansion in future, we believe V-mart to follow the same Top line and Bottom line trend in the upcoming years as well. ROE of the
NSE Code VMART Company for FY2016 was 12.69% and we believe it to reach over 18% next fiscal backed by better margins. We value the Company at 30x to its FY19E EPS of 35 and arrive at a TP
of INR1050.
Bloomberg Ticker VMART IN

Reuters Tickers VMAR.BO

Face Value (INR) 10.00

Exhibit: V-Mart Retail Ltd.-Financial Performance at a glance (Standalone)
Diluted EPS FY16 (INR) 15.29

Current P/E 51.09 Particulars (INR Cr) FY 2014A FY 2015A FY 2016A FY 2017E FY 2018E FY 2019E
Average P/E 23.89
Net Sales 574.11 718.98 808.16 958.40 1184.90 1412.30
Growth (%) 49.87 25.23 12.40 18.59 23.63 19.19
Beta vs Sensex 1.15
EBITDA 52.25 63.60 62.16 75.35 95.15 119.00
Debt/Equity (x) 0.12 EBITDA Margins (%) 9.10 8.85 7.69 7.86 8.03 8.43
Average Daily Volumes 35341 Net Profit 25.16 38.57 26.69 35.50 47.35 63.35
Net Profit Margins (%) 4.38 5.36 3.30 3.70 4.00 4.49
Stock Return Vs. Nifty Return Chart Net Profit Growth (%) 39.70 53.30 -30.80 33.01 33.38 33.79
EPS 14.01 20.74 15.29 19.65 26.25 35.05
BVPS 94.75 113.74 127.63 146.50 171.50 205.80
P/E 20.49 27.45 30.73 37.74 28.25 21.04
P/BV 3.03 5.00 3.68 5.03 4.25 3.56
EV/EBITDA 10.51 15.98 13.84 18.40 14.57 11.54
ROE (%) 15.83 19.93 12.69 15.40 18.10 18.40
Source: Ace Equity, Bloomberg and SMIFS Research

5
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Stock Recommendation Expected absolute returns (%) over 12 months

Strong Buy >20%
Buy between 10% and 20%
Hold between 0% and 10%
Sell 0 to <-10%
Neutral No Rating
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