Vishal Retail, promoted by first-generation entrepreneur Ram Chandra Agarwal and his wife Uma Agarwal, operated 50 stores including two franchisee stores end April 2007. These 50 stores are spread over about 12,82,000 square feet and are located in 39 cities across 18 states in India. To strengthen its supply chain, the company has set up seven regional distribution centers and an apparel manufacturing plant.
Following the concept of value retail in India, Vishal Retail sells quality goods at reasonable prices by either manufacturing themselves or procuring them from manufacturers (primarily from small- and medium-size vendors and manufacturers). The company targets middle and lower-middle income groups, which constitute a majority of the population in India. It sells ready-made apparels (including its own brands) and a wide range of household merchandise and other consumer goods such as footwear, toys, watches, toiletries, grocery items, sports items, crockery, gift and novelties. Apparel contributed 63% of the total sales in the year ending March 2007, followed by non-apparel (22%) and FMCG products (15%).
Of the 50 stores, Vishal Retail has 43 stores located in Tier II and Tier III cities. North India accounted for 62% of FY 2007 sales, east India 19%, west India 15% and south India 4%. The company has its own fleet of 41 trucks to transport and deliver the company’s products. Its one apparel manufacturing plant is located at Gurgoan in Haryana. To explore the possibility of another manufacturing facility, 7.24 acres of land has been acquired in Dehradun, Uttaranchal as well as a freehold interest in an 82,830 square-feet plot at Hubli in Dharwad, Karnataka.
In FY 2007, Vishal Retail increased its number of stores from 26 to 49. In FY 2008, it plans to open 22 more stores, taking the total to 72 stores, from the current 50 stores. The total estimated cost for these 22 stores is Rs 105.25 crore. Most of the 22 stores will be located in Tier III cities (18 stores) followed by Tier I cities (three stores) and Tier II cities (one store).
The average sales per sq ft was Rs 7023 in FY 2007, when the average retail space was 8,58,055 sq ft. This was slightly lower compared with the average sales per sq ft of Rs 7139 in FY 2006, when the average retail space was 4,04,017 sq ft. Like-to-like sales in FY 2007, which included the 13 stores that had been open for all the 12 months in two consecutive years, grew 12% to Rs 188.97 crore.
Vishal Retail has proposed raising Rs 110 crore through its IPO to fund its new stores. Out of this, the company is going to use Rs 104.151 crore to fund its 22 upcoming stores. The rest of the money will be used for issue expenses.
Strengths
- First-mover advantage in Tier III cities, where organised retailing is yet to make a significant mark. This will help in establishing brand and build customer loyalty before competition crops up.
- Well placed to exploit the growth potential in value retailing, expected to witness sustained and accelerated growth in India
- Backward integration and in-house manufacturing of part of the apparel products sold in stores give competitive advantage in terms of value and cost. Margin is generally 5-6% higher compared with other labels. Private label accounted for 10% of total sales in FY 2007.
Weaknesses
- Rajendra Kumar Agarwal, brother of the company’s promoters, runs a retail business in the eastern region under the brand, Vishal Garment, through an entity Aarkay Retail Pvt Ltd. This could cause conflict with Visha Retail’s business, creating confusion among customers and, consequently, affecting its operations in the eastern parts of the country.
- Negative cash flows from operating activities in four of the past five consecutive years due to bulging inventories. This has resulted in a debt-equity ratio at 1.92 end March 2007.
- Organised retailing is a highly competitive and crowded industry, which is competing with itself and with unorganised retail. Competition may become even fiercer once Reliance and Bharti-Wal Mart make their presence felt and others expand.
Valuation
Vishal Retail has set a price band of Rs 230 to Rs 270 per equity share of Rs 10 face value. At the lower band of Rs 230 per share, P/E would be 21.3 times the annualised EPS for FY 2007 on post-issue equity of Rs 23.11 crore.
At the upper price band of Rs 270 per share, P/E would be 24.1 times the annualised EPS in FY 2007 on post-issue equity of Rs 22.40 crore. It’s not proper to compare Vishal Retail with existing listed players like Pantaloon Retail, Shopper’s Stop and Trent (India), which enjoy P/E of around 90.4, 80.7 and 43.2, respectively, due to the different scale of operations and business models. Nevertheless, retail being a high growth industry, Vishal Retail can expect above 20 P/E.