Top tier returns?

Vishal Retail’s IPO appears reasonably priced considering the growth potential and its unique strategy.

The great Indian middle class has demonstrated its purchasing power time and again, the proof of which could be found in markets ranging from telecom to the burgeoning retail sector. To capitalise on the spending spree, and benefit from the rising disposable incomes across the country, Vishal Retail has adopted a strategy to focus on mid and smaller cities.

The company has 51 retail hypermarkets across 39 cities so far, of which only seven are located in large (Tier-I) cities. It now plans to expand its reach even more in order to create a pan-India presence with 82 stores by FY08. To fulfil this objective, it is coming up with an initial public offering (IPO) to aggregate Rs 110 crore, to part fund its expansion.

Bottom of the pyramid
Vishal Retail targets consumers mainly in the second and third tier cities of India, where its larger competitors have not yet set foot. Apart from tapping the aspirational consumers early on, its proposition of value retailing tends to work better due to low rentals for retail spaces in these cities.

"Our average cost of rent across all the shops is Rs 31.50 per sq ft, while our retail price of goods remains the same as it would be in the metros," claims Ram Chandra Agarwal, the company's chairman and managing director.

Vishal's rentals are considerably low compared to the average rentals in Tier-I cities which range anywhere between Rs 50- Rs 100 per sq ft. In addition to lower costs, the company has also managed to set up an efficient supply chain, and is now confident of entering even the larger cities with a similar value retailing proposition.

Vibrant past
Starting with a topline of Rs 50 crore in fiscal 2003, Vishal Retail has managed to grow to Rs 603 crore last year (See table: Solid growth). Its topline grew at a compounded rate of over 86 per cent annually, over FY03-FY07.

For the same period, its compounded growth in net profit was a whopping 160 per cent. On the operating profitability front, the company has consistently improved its operating profit margins from a meagre four per cent in FY03 to over 11 per cent in FY07.

"Going further, we expect to maintain similar levels of profitability by integrating backward," says Ritesh Rathi, chief operating officer.

The company already has a 5,000 pieces per day apparel manufacturing unit in Gurgaon, and plans to set up another unit in Dehradun. Its existing shareholders include HDFC, a Delhi-based private equity firm Gaja Capital, the Burman (of Dabur) and Munjal (of the Hero group) families, among others.

Valuations
Given that the organised retail has penetrated the Indian markets just 6 per cent, and is expected to grow by 25 per cent annually to become a Rs 12,180 crore industry by 2010, the potential is vast.

Vishal Retail, with its strategy to spread out to the smaller cities, is creating a strong base to compete with its larger counterparts. The company has over 1.2 million sq ft of retail space currently, and has another 4 lakh sq ft tied up for 13 stores as part of its expansion plans for FY08.

At 13-15 times FY08 estimated earnings, Vishal Retail appears reasonably priced compared to larger established organised retailers like Pantaloon Retail (67), Shoppers' Stop (77) and Trent (22). When compared on other parameters, such as return on equity and return on capital employed, the ratios are favourable for the company (See table: Returns).

Vishal Retail is expected to earn a RoE of about 13 per cent on its expected FY08 earnings, as compared to Pantaloon's 9 per cent, Shoppers' Stop's and Trent's estimated 7 per cent. The RoCE is expected to be about 27 per cent on its estimated FY08 earnings, as compared to Pantaloon's 7 per cent, Shopper's Stop's 8 per cent and Trent's 6 per cent. To sum it up, the issue appears worth subscribing both for short and long term investors.