Wednesday, September 9, 2009


Compelling valuations in a turnaround sector

Organised retail to be out of woods; to grow at healthy CAGR of 19% India’s organised retail industry is set to post ~19% CAGR over the next four years to reach INR 2,024 bn by FY13E. Clothing and fashion accessories account for 38% of total organised retail spending and, hence, they will be one of the key beneficiaries of this growth. We believe, low penetration, favourable demographics, steady economic growth, increasing availability of credit, and improving cost structures will reverse the now sagging fortunes of organised retail.

Presence across value chain; garment manufacturer to specialty retailer Koutons Retail (KRIL) is a specialty apparel retailer cum manufacturer offering a complete range of apparels (casual and formal). The company operates ~1.29 mn sq ft (CAGR of 126% over FY05-09) of retail space through 1,374 outlets. Almost 82% of KRIL’s stores are franchisee owned and operated. This model limits upfront capex required to set up a store and allows greater flexibility in terms of location.

PAT margins to expand; earnings CAGR of 24.6% over FY09-11E likely The company now plans to focus on large format ‘family stores’ (where garments co-exist with accessories and footwear) which attract higher footfalls and are more economical. KRIL plans to convert its existing stores to family stores and rationalise stores based on demand (it closed 38 unviable stores and opened 17 new family stores in Q1FY10). We expect interest costs to dip due to restructuring of high cost debt and softening of interest rates. This is likely to increase its PAT margins over the coming quarters.

Outlook and valuations: Attractive; initiating coverage with ‘BUY’ KRIL’s USP is its ability to cut down intermediaries and bring fashion to masses at affordable prices. We are positive on the company’s growth based on its business model, expansion plans, and higher margins compared to other retailers on account of integrated operations. We initiate coverage on the stock with ‘BUY’
recommendation and value it at 12.5x FY11E EPS (50% discount to Pantaloon’s FY11 P/E multiple) to arrive at a target price of INR 500. Our key concern is the high level of inventory the company carries on its books. On relative return basis, the stock is rated ‘Sector Outperformer’ (refer rating page for details).

To see full report: KOUTONS RETAIL