Lanco Infratech, SBI, Shree Renuka Sugar, Aban Offshore, Vishal Retail, Larsen Tourbo

Lanco Infratech, SBI, Shree Renuka Sugar, Aban Offshore, Vishal Retail, Larsen Tourbo

Vishal Retail vaults as board approves sale of retail, wholesale units

Vishal Retail jumped 9.54% to Rs 55.70 at 11:45 IST on BSE, after the company's board approved sale of its retail business to Shriram Group.

Troubles mount for Vishal Retail

Ram Chandra Agarwal, founder and managing director of Vishal Retail Ltd., said that he is prepared to step down as the head of the company if that helps the beleaguered retailer. "I am agreeing to anything that is in the benefit of the company, including stepping down," he said. Vishal Retail has been posting losses over the last three quarters amid an economic slowdown that has hit retailers hard. Agarwal also said that he was also prepared to dilute an unspecified stake from his share of 63% in Vishal Retail to pave the way for any investor. Reports said that private equity firm TPG has evinced interest in acquiring a majority stake in Vishal Retail, which has gone in for corporate debt restructuring (CDR). Investment banking sources said TPG has made a Rs2.5bn offer for the stake held by Vishal Promoter and Chairman Ram Chandra Agarwal before the CDR cell. Agarwal and other promoters hold 60.23% stake in the company. The TPG proposal values the beleaguered apparel retailer at Rs4.17bn. The Mumbai-based CDR cell is holding talks with lenders as part of Vishal Retail’s debt recast. After the joint lender meeting (JLM) remained inconclusive on January 30, the next JLM is scheduled next week. According to reports, Mumbai-based Wadhawan Group may also join the race to acquire a controlling stake in Vishal Retail, though it has not submitted any proposal as of now.

IOC, Larsen Tourbo, Sun Pharma, PNB, Tata Motors, Hindalco, Unitech, MTNL, Titan Industries, Tata Tea, OBC, Indiabulls Real Estate, Andhra Bank,IVRCL

IOC, Larsen Tourbo, Sun Pharma, PNB, Tata Motors, Hindalco, Unitech, MTNL, Titan Industries, Tata Tea, OBC, Indiabulls Real Estate, Andhra Bank,IVRCL, Vishal Retail, Radico Khaitan, Havells

Ultratech Cement, Wipro, Vishal Retail, YES Bank

Ultratech Cement, Wipro, Vishal Retail, YES Bank

Vishal Retail

Value retailers were, for some time, a preferred option among retail stocks based on the belief that they fare better during tough times. But recent numbers from Vishal Retail, a value retailer present in 181 stores across most Indian states, suggest that not all value retailers are well-placed to weather the slowdown.

Despite its very low valuations, investors can consider selling this stock. The company’s sales growth appears set to slow down sharply, as its same-store sales moderate and it scales back on expansion plans.

A slowing topline, given the thin margins and a high debt burden, may lead to a deteriorating profit picture, pointing to earnings uncertainty for the next couple of years. The stock has fallen precipitously from our earlier ‘Book Profits’ recommendation at Rs 689 (June 22, 2008) and now trades at Rs 53. It is valued at a PE of four times its trailing 12 month earnings with an enterprise value of 0.6 times its 12 month sales and 0.5 times its estimated FY-10 sales.

Space addition was aggressively pursued, its store network surging from the pre-IPO 49 to the current 181. Vishal had floated its IPO in mid-2007, raising about Rs 110 crore, primarily to fund space expansion. Of this, Rs 104 crore, besides debt, was employed for the purpose.
Sales slowdown

Successive quarters, post-IPO, saw revenues on the rise, and sales in the quarter ended December 2008 increased 24 per cent over the same period last fiscal. But this is clouded by the fact that sales have been weakening sequentially, shrinking by 5 per cent in June quarter and again by 6 per cent in December quarter of this fiscal.

Vishal’s sales in North India, especially, have been severely affected; its concentration in that region has dealt quite a blow to sales. The company’s focus on Tier-III cities — 139 of its 181 stores — means an overall yield per square foot that is lower than peers. Over 50 per cent of Vishal’s sales come from apparel retailing, where spending has been vulnerable as consumers feel the pinch on their household budgets.
Reliance on existing stores

In the light of slowing consumer spending, and narrowing discretionary spending evidenced by low turnover in the consumer durables segment, Vishal is restricting expansion plans to about 5-10 per cent on a year-on-year basis.

Any addition to retail space will be undertaken through franchisees. Franchise stores currently number 13, and have not contributed significantly to the company’s expenses or margins as yet.

Cutting back expansion means that Vishal will have to rely for its growth on sales generation from existing stores rather than additions as has been the case thus far. The picture on this is not confidence-inspiring, as same-store sales growth for the first two quarters of FY-08 was just 7-8 per cent and then turned negative in the third quarter.

There has also been a drop in daily footfalls on a quarterly basis by about 7 per cent. Vishal has managed a marginal increase in conversion rates, but given an overall slowdown in spending, this aspect offers little cheer.
Narrowing margins

Viewed in relation to its peers, Vishal has performed reasonably well at the operating level, with margins for the past two quarters at 12 per cent. It has been able to bring down operating costs by re-negotiating rentals with landlords; in some cases managing a 40-50 per cent reduction in rates.

Added to this, it has reduced areas in some stores, and cut down on its warehouse space by nearly half. Logistics has been redesigned in an effort to make it more cost efficient. Using the franchisee mode of expansion in place of owning new stores will require almost nil capex requirements and reduced expenses on power and rentals. Such cost controls may not be possible with owned stores.

However, despite these measures, with the deceleration in sales, high interest costs and depreciation have cut net profit margins down to less than 1 per cent in the December quarter. Debt rose by 44 per cent , with interest payouts more than doubling in the past year. Fixed assets increased 34 per cent in FY09, having already doubled in FY08, pushing up depreciation costs by 80 per cent in a year.

Even so, asset turnover has steadily declined in the past three years, a trend mirrored by inventory turnover. Vishal aims at minimising inventory levels by bringing them in line with sales and will attempt clearing out stocks via discounts. While this may unlock working capital, it will have negative margin implications.
Burdened by debt

Vishal’s debt equity ratio is fairly high at 2.6 times. However, it is the interest cover which is more of a concern, having shrunk from seven times to 2.6 times in three years. A portion of debt is due to be repaid this March, and the company has stated that it proposes to roll over debt, for the second time since last year.

Given the more stringent environment now prevailing on bank credit, this may pose challenges, especially given its weak operational cash flows and depleting interest cover. Benefits from extending credit period allowed to it by other creditors may also not improve cash flows significantly.

Vishal Retail

Vishal Retail

Hindustan Unilever, Vishal Retail, India Property, Zee Entertainment

Hindustan Unilever, Vishal Retail, India Property, Zee Entertainment

Vishal Retail, India Real Estate

Vishal Retail, India Real Estate

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Vishal Retail

Vishal Retail

Vishal Retail

Shareholders can consider booking profits in the stock of Vishal Retail. Investors who subscribed to the company’s initial public offer last June are still sitting on a 160 per cent return on the offer price, though the stock has corrected substantially from its highs. The current market price of Rs 689 values the stock at about 25 times its likely FY-09 earnings, assuming the company delivers on its guidance.

The valuation is slightly stiff, in our view, as it factors in sustained ramp up in new stores. We are somewhat sceptical of the company’s ability to meet its expansion target for FY-09, as it is not yet adequately funded for the expansion. Even if it manages to raise equity worth Rs 200 crore through private placement, as proposed, with the balance to be funded by debt, higher interest costs are likely to be a drain on earnings over the next year. As a slower-than-expected pace of rollout could lead to a de-rating of valuations, shareholders can consider booking profits at least partially on the stock.
Progress so far

Vishal Retail operates a chain of stores that sell apparel, FMCG and other consumer products at discounted prices to value conscious customers. The company focuseson small towns and cities where aspirational spending is on the rise.

Vishal Retail reported a 67 per cent growth in revenues and a 62 per cent rise in profits in 2007-08, on the back of a significant ramp up in retail space. Vishal Retail beat its expansion target for FY 08, opening 50 stores as against the proposed 32. It now has over a 100 stores and a retail space of 2.3 million sq ft.

The company’s operating margins improved 1.2 percentage points to 12.7 per cent in FY-08, on the strength of an increasing share of private labels. The company has also managed to improve the share of FMCG sales in the revenue mix (18.6 per cent versus 15 per cent earlier), as part of its strategy to attract footfalls.

Interest costs have, however, jumped to about 3.8 per cent of sales from 2.4 per cent earlier. This may be on account of higher debt used to fund burgeoning inventory costs, now at Rs 2,500 per sq ft. The high inventory poses a strain on working capital requirements and is a cause for concern.

Same-store sales (sales of existing stores, excluding openings) growth has slowed further to 7 per cent in FY-08 from 11 per cent in FY-07. This means that high revenue growth has been driven significantly by store expansion, rather than growth from existing stores. Competitors such as Big Bazaar have managed to maintain at least low double-digit same-store growth.
Ambitious growth plans…

Vishal Retail continues to have ambitious growth plans, targeting 190 stores with over 3.7 million square feet by FY-09 and over 500 stores with 10 million sq ft by FY-11. It also intends to invest in logistics, restaurants and consumer PE fund (similar to that run by Pantaloon).

Expansion is to be led by Tier-3 and Tier-4 towns, which might mean lower ticket sizes and average sales per sq ft, although profitability may remain at the same levels due to lower rent and employee costs.
....but funding a constraint

If the company manages to ramp up retail space at the rate it has in the past, revenues and earnings could grow at a strong pace.

However, funding remains a niggling worry. While funding has not been a cause for concern in the past, we adopt a more cautious view in the current liquidity environment.

To meet its expansion plans for the next three years, Vishal would have to invest about Rs 2,500 crore. The company has little by way of internal accruals. Vishal intends to fund its expansion plans through a 2:1 combination of debt and equity. It is already heavily leveraged and bears an interest cost of 11.75 per cent on its loans. This could go up in a rising interest rate environment. These circumstances call for a moderation in growth expectations.

Vishal Retail

Vishal Retail

Vishal Retail

Vishal Retail

Vishal Retail

Vishal Retail

Kotak Mahindra, Vishal Retail, Koutons Retail, GE Shipping, Varun

Kotak Mahindra, Vishal Retail, Koutons Retail, GE Shipping, Varun

Vishal Retail

Vishal Retail

Alembic, UTV Software, Vishal Retail, Shoppers Stop, Suzlon Energy

Alembic, UTV Software, Vishal Retail, Shoppers Stop, Suzlon Energy

Vishal Retail, DS Kulkarni

Vishal Retail, DS Kulkarni

DS Kulkarni, Vishal Retail

Religare maintains 'buy' on DS Kulkarni Developers MUMBAI: Religare Securities believes DS Kulkarni Developers has solid growth prospects and maintains ‘buy’ on the stock with a target price of Rs 502. At the current price of Rs 280, DS Kulkarni trades price to earnings of 12 times 2007-08 estimated earnings per share of Rs 23.3 and 5.6 times 2008-09 EPS of Rs 49.9. The company quotes at 0.4 times one-year forward net asset value of Rs 627 which is relatively cheaper than Mumbai and Pune-based reality players. The target price of Rs 502 for the scrip represents a multiple of 0.8 times one-year forward net asset value. DS Kulkarni Developers has entered into an agreement with Netherlands-based GTC Real Estate for joint development of 250 acre multi-services special economic zone at Pune. The company has possession of the land and has already received in principle approval for the SEZ which will have both processing and non-processing areas. The company has commercial terms with GTC for 230 acres. The remaining 20 acres will be utilised for film animation school, with the several European countries evincing interest in establishing strategic tie-ups for the same. The Dutch real estate developer will be investing $96 million in the zone in a phased manner. The company’s saleable land bank expands to 34 million square feet, which is expected to be executed by 2013.

Religare recommends 'buy' on Vishal Retail; target Rs 1,018

Religare Securities recommends a ‘buy’ on Vishal Retail with a potential appreciation of 45 per cent.

Vishal Retail is one of the fastest growing retail companies, having opened 70 stores in 49 cities over past five years. The company rolled out 1.3 million square feet of retail space at the end of 2006-07 and plans to add another 5 million square feet over next three years. Of this, it aims to add 1.1 million square feet in 2007-08 and already tied up with real estate developers for 0.8-0.9 million square feet.

Religare expects the new rollouts and steady growth in old stores to enable Vishal to witness 77 per cent revenue CAGR to Rs 3,320 crore over FY07-FY10.

The brokerage has undertaken a comparative valuation of Vishal Retail with Pantaloon Retail and Shoppers’ Stop. Although the comparison is not on a like-to-like basis, Religare sees common ground in the growth potential for all these companies.

India’s $300 billion retail sector is at a point of inflexion and is estimated to grow at CAGR of 6-7 per cent over 2007-10. According to industry sources, organised retail is estimated to grow at CAGR of 25-30 per cent over 2007-10 to reach $60 billion.

Both existing and new players have announced aggressive expansion plans. Religare estimates that the organised retail sector will receive investments over $20 billion over next five years.

Vishal has highest EBITDA margin amongst peers like Shoppers’ stop and Pantaloon retail. The brokerage believes tighter cost control has enabled Vishal to record strong margin expansion, with the EBITDA margin coming in at over 11 per cent for 2006-07.

As a conservative measure, Religare has maintained the existing discount to peers in its valuation based on 2008-09 estimates, thus the target 2008-09 P/E multiple of 22.6 times for Vishal Retail, a 52 per cent discount to its peer. This gives a target price of Rs 1,018 for the stock, which signifies a price-to-sales ratio of 1 times 2008-09.

Vishal Retail Allotment

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