India Retail
Initiation of Coverage:
Ready for Take-off
Attractive, potentially large and profitable industry:
India’s organized chain-store retail industry is at an
inflection point. We estimate it has the potential to
deliver around 32% CAGR over the next 10 years,
taking industry size to US$64 billion in F2015, and
support 10 large players. Globally, the industry is quite
profitable: based on our review of 480 retailing
companies available on Bloomberg’s database, 94%
were profitable in C2005 with an average net profit
margin of 4.5%.
Competition to increase; first movers to benefit: We
expect competitive activity to increase in both the
domestic and international markets, especially in the
hypermarket/foods segment. Since scale and
efficiencies are two critical drivers for success in the
retail industry, first movers are likely to do well. Global
experience indicates that a large number of those late
to the industry had to exit markets due to non-viability.
Limited track record compounds execution risk:
Organized retail is a nascent industry in India and
existing players have insufficient track records in
execution. Furthermore, most retail stocks are already
factoring in part of the growth expectations and, in our
view, investors will be unforgiving on any
disappointment from execution.
Prefer Pantaloon Retail (PRIL) to Shoppers’ Stop
(SS): PRIL (Rs2050, O) is our top pick, largely on
account of its more attractive valuations and higher
growth potential over the next three years. However,
PRIL’s expected higher returns come with
commensurately greater execution risk. Shoppers’
Stop (Rs600, E) is a lower risk company with higher
visibility of earnings growth, but ...