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Analyst Research Report Snapshot


Shoppers Stop (SHOP) - Qtr. Update - Dtd. May 01, 2013




Axis Capital Limited


02 May 2013





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Shoppers Stop’s departmental store operating margin at 5.2% in FY13 is at its lowest level in 4 years, mainly due to low productivity of new stores in a rising cost environment. Given current weakness in discretionary consumption and aggressive store roll out in FY14, we now expect margin recovery to be gradual over next 2 years. We reduce our profit estimate for standalone business by 26% to Rs 585 mn in FY14 and by 22% to Rs 925 mn in FY15. Thus our sum-of-the parts valuation has been reduced to Rs 325 (Rs 418 earlier). Downgrade to SELL with downside of 13% from CMP of Rs 374. H2FY13 sees recovery in like-to-like (LTL) growth but discretionary demand environment remains challenging: H2FY13 LTL growth saw a sizable uptick to 11% compared to 3% in H1, pointing towards a much healthier growth outlook in FY14. Management expects 8%-10% LTL growth in FY14 against 7% in FY13. However, we believe the magnitude of urban demand recovery will be restricted as (a) consumer sentiments remain pessimistic (survey conducted by Bluefin) and (b) wage growth is not broad-based. Operating margin to remain under pressure: It is a difficult to envisage a sizable operating margin uptick despite it being at a 4-year low as (a) aggressive expansion will continue (17-18 rollouts planned on a base of 55 stores over next 2 years), (b) stores that have been added over the past 2 years (17) are seeing an extended breakeven due to suboptimal throughput, and (c) rentals, service tax and fuel cost (up 25%) are impacting store profitability. We reduce our operating margin assumption for FY14 to 5.5% (6.3% earlier) and for FY15 to 6.2% (6.8% earlier) respectively. Key risk to our call: LTL growth over 15% in FY14. Key risk to our call: LTL growth over 15% in FY14. Regards, Hemant Patel (Executive Director – Consumer) Institutional Equity Research Axis Capital Ltd Tel: +91 22 4325 1105 Shiv Nanda (Asst VP- Consumer) Institutional Equity Research Axis Capital Ltd Tel: +91 22 4325 1124

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