>SHOPPERS STOP LIMITED: Near term pain, Long term growth story intact

SSL has posted 3QFY12 results and the numbers were below expectation. Key highlights of result are as follow:


Key Highlights
■ Standalone net sales for SSL increased by 9.2% YoY to ` 5418.3 mn. The moderation in
topline growth was mainly due to decline in LTL sales growth of 1%. This was mainly led
by 9% decline in LTL volume partially offset by increase in ASP by 8%. Apparel sales
(contributes 57.2% to the topline) were impacted due to ~18% YoY increase in prices.
Apparel prices are likely to soften in 1HFY13E and management expect healthy volume
growth in 3QFY13E. On the positive side, gross margin improved marginally by 10 bps
YoY to 35.4% and contribution of Bought out/Concession sales declined to 50.3% as
compared to 55.2% in 3QFY11, implying declining inventory risk.
■ EBITDA declined by 19.7% YoY to ` 413.5 mn mainly due to increase in employee cost,
rental expense and other operating expense by 31.4%, 20.4% and 18.5% YoY to ` 331.3
mn, ` 471.6 mn and ` 701.5 mn respectively. This increase in operating expenses were
due to opening of 6 SS stores in the qtr, which leads to front loading of employee, rental
and operating cost. Overall, EBITDA margin declined by 275 bps YoY to 7.6%.
■ Interest cost increased by 204.8% YoY to ` 75.5 mn due to increase in debt led by new
store capex and increase in working capital requirement. Standalone debt as of 31st Dec
2011 stood at ` 2875.2 mn as compared to that of ` 1487.2 mn on 31st March 2011.
Overall, PAT declined by 30.8% YoY to ` 192.9 mn.
■ Hypercity: For 3QFY12, Hypercity posted net sales of ` 1976.2 mn (up 29.3% YoY),
EBITDA of ` -111.3 mn (down 26.8% YoY) and PAT of -245.1 mn (down 34.1% YoY).
The LTL sales growth was 12%, with LTL volume growth of 18% and decline in ASP of
6%. Out of total 12 stores, 5 stores were EBITDA positive in 3QFY12 with store EBITDA
of ` 7.9 mn as compared to loss of ` 13.4 mn in 3QFY11.


Outlook: We have revised our estimates based on the existing economic and business
scenario. Going ahead, we expect healthy sales traction in Shoppers Stop, as the new stores gets ramp-up. However, operating overheads will take 15-20 months to get fully absorbed and hence will keep overall EBITDA margin under pressure. We expect sales and EBITDA to grow at CAGR of 23.4% and 22.1% during FY11-FY14E period respectively. We expect the company to post EBITDA margin of 7.0%, 7.5% and 7.9% in FY12E, FY13E and FY14E respectively. Overall, we expect PAT to grow at CAGR of 22.3% during FY11-FY14E. We have assumed 8 store addition each in FY13E and FY14E. Hypercity is progressing well and is expected to be EBITDA positive at company level in next 12-15 months.


Valuations: At CMP, the stock is trading at P/E ratio of 40.4x and 30.7x FY12E and FY13E earnings respectively. Our fair value of the stock based on SOTP methodology comes to` 298/share. We have valued standalone SSL on DCF valuation method, 51% stake in Hypercity on EV/sales multiple of 1.0x and all equity investments as on FY11 balance sheet on book value. We have revised our rating from Accumulate to Neutral. Upside risk to stock price in the near term could be policy change as regards the FDI in multi-brand retail (the favorable change at the centre, i.e probable change in UPA constituents post results of the ongoing state elections could possibly lead to this policy change). The stock will continue to command the perceived acquisition premium in anticipation of the favorable outcome. We will revisit our rating post outcome of this event.