Weaker macro environment could mean moderation in demand and volumes in coming quarters.
While the March 2011 quarter saw major retail companies record healthy growth in revenue, price increases, higher interest rates and food inflation are likely to impact their revenues and profitability in the next few quarters.
Although retailers such as Pantaloon say the slowing is visible only in automobiles and consumer durables and hasn’t impacted other goods, analysts believe demand is likely to moderate in the current financial year for the sector. They expect top retail companies to post revenue growth of 25-30 per cent, as compared to 30-32 per cent increase in 2010-11.
| STRONG REVENUE GROWTH | |||
| in Rs crore | Pantaloon Retail | Shoppers Stop* | Titan Ind |
| Sales | 2,811 | 459 | 1,790 |
| Change (%) | 17.6 | 20.4 | 36.5 |
| Operating profit | 248 | 41 | 102 |
| Change (%) | 15.0 | 36.5 | 1.6 |
| OPM (%) | 8.8 | 8.9 | 5.7 |
| Change (bps) | -28 | 113 | -198 |
| Net profit | 51 | 20 | 87 |
| Change (%) | 34.8 | 27.8 | 70.0 |
| FY12 PE (x)^ | 22.0 | 41.0 | 35.3 |
| For March 2011 quarter; % change is year-on-year * Excludes Hypercity FY12 PEs are based on analysts’ estimates (Pantaloon’s year ending is June) Source: Companies, Sharekhan | |||
Also, though commodity prices have cooled a bit, given the lag between price rises and input costs, operating profit margins are likely to fall 25-30 basis points in the next two quarters. Says IDFC Securities analyst Bhushan Gajaria, “The coming quarters might not be great for the sector, but it is likely to rebound in calendar year 2012 if foreign direct investment (FDI) in multi-brand gets the go-ahead and stability returns to the macro environment.”
GROWTH
Though the near-term outlook is bearish, the stocks of Pantaloon Retail, Shoppers Stop and Titan gained by nine to 20 per cent over the past month, while the Sensex was flat in the period. Part of the gains (nearly six per cent last week) was due to the recommendation by an inter-ministerial group to allow foreign direct investment up to 51 per cent in multi-brand retailing. The recent uptick in share prices, however, means there is little room for upside from these levels for these three stocks.
Going ahead, a few categories like apparel would witness some demand re-adjustment, owing to a sharp 15-20 per cent increase in prices, believes a Sharekhan report. On a broader level, too, growth is seen slowing for top retailers.
“Given the inflation, higher interest rates and price hikes, expect a moderation in revenue and volume growth in the next couple of quarters,” says Sageraj Bariya, analyst at Angel Broking.
Operating profit margins, however, contracted up to 200 basis points in the quarter on the back of a 50-100 per cent year-on-year jump in input costs and the failure of companies to fully pass these on to consumers. While operating profit growth was muted at 15 per cent, net profit growth on the back of higher other income and lower taxes grew at a better pace.
While there could be a drop in volumes, retail companies continue to expand. Shoppers Stop plans to add 24 stores in 2011-12, six of which were added in April. The new stores will add 0.75 million sq ft (msft) and take the total space to 4.1 msft. Similarly, Pantaloon, which has 14.85 msft under operation, is likely to add about two msft in the year.
TRENDS
Recent data shows high interest rates have started impacting consumption, which fell to 57 per cent of GDP in 2010-11. The fall in leveraged spending reflected in auto sales and consumer durables’ production. However, analysts believe discretionary spending, especially in the fashion category, could be more impacted than other segments.
A Sharekhan report says rising interest rates and food prices, coupled with a 15-18 per cent one-time price rise in the retail sector, would marginally impact volume and a demand readjustment was likely in the second half of 2011-12. This could lead to lower growth in margin and profitability of retail companies during this period.
Analysts believe that in the case of Pantaloon, Ebitda (earnings before interest, taxes depreciation and amortisation) are likely to trend down, as a larger portion of its revenues are likely to come from value retailing.
While lifestyle and home categories fetch Ebitda margins of 10.5 per cent, the value retailing business (60 per cent of overall sales) fetches the company margins of 7.5 per cent. Key triggers for the stock, according to Enam analysts Hemant Patel and Shiv Nanda, are the opening of FDI in retail, monetisation of investments in subsidiaries which will provide growth funding and ease in debt build, breakeven in the home business and lower losses in electronics.
For Shoppers Stop, while store expansion and cost control measures are likely to bear fruit, the key growth driver is expected to be hypermart subsidiary, Hypercity, expected to turn Ebitda-positive in 2011-12.
Good demand for branded jewellery and watches and network expansion should keep volume growth strong for Titan. However, an Enam report says operating profit margin expansion is unlikely due to an aggressive roll out plan and one per cent excise duty on branded jewellery. Thus, there is marginal upside for the stock from these levels.
