Retail’s underperforming

The Indian retail industry is characterised by high growth amidst concerns of intense competition, high rentals and higher operating costs.

Given the latter, it’s not surprising that stocks of Shopper’s Stop (consisting of brands like Shopper’s Stop, Home Stop, Crossword, Mothercare and Brio) and Trent (includes Westside, Star India Bazaar and Landmark) have under-performed the Sensex (Trent in the past one-year and Shopper’s since May 2007).

Interestingly, the biggest player (by market capitalisation), Pantaloon, has marginally outperformed the Sensex during the same period.

One of the well-known reasons why Pantaloon’s stock has been performing lately is its move to unlock value. Pantaloon plans to raise Rs 325 crore by offering its 10.16% stake in Future Capital Holdings, which results into a value of Rs 2,200 crore for Pantaloon’s 74% stake in Future Capital  (about a fourth of Pantaloon’s current market capitalisation).

Analysts believe that its other subsidiaries also hold a lot of value that can be unlocked.

However, keeping the value-unlocking story apart, Pantaloon’s situation in the retail business is not significantly different from Shopper’s Stop or Trent. This is because Pantaloon too faces pressures of higher real estate costs, rising staff costs and hence, the pressure on profit margins.

All the companies have major expansion plans, which will add to the sales going forward. What’s of concern though is that the sales from existing stores are not encouraging (declining or at the best stable), thanks to the rise in competition as many companies are planning new malls in the same cities/area.

Among reasons for the underperformance of the two stocks, analysts say that in case of Shopper’s Stop and Trent the two companies are expanding slowly as compared to Pantaloon.

Where Pantaloon has almost doubled its retail space in the last one year, Shopper’s Stop and Trent have added around 25% to their respective cumulative retail space during the same period.

On the other hand, while companies are increasing their retail space, it’s the execution that is likely to pose a challenge going forward. Companies are already facing execution delays.

And retaining trained manpower has become a challenging task besides staff costs are also showing upward pressure. Analysts say that the benefits from economies of scale are unlikely to come any time soon given the present conditions.

Valuations for Shopper’s Stop and Pantaloon on a trailing 12 months (ended June 2007) basis are as high as 91.7 and 63.5 times, respectively. Given the situation, it looks difficult to sustain valuations at such high levels. For Trent, even as it trades at a PE of 26 times, there appear no triggers for this stock as of now.

Meanwhile, analysts maintain an ‘out-performer’ rating on Pantaloon on the back of its value unlocking story, while they are neutral on Shopper’s Stop and Trent.

Contributed by Vishal Chhabria & Pallavi Pengonda