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Shoppers Stop (SHOP) - Visit Note - Dated - July 09, 2013




Axis Capital Limited


09 Jul 2013





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Shoppers Stop (SS), which operates India’s most successful departmental stores, will continue to face challenges due to weakness in discretionary consumption. This has impacted old and new store productivity. Stress on margins and profitability will be further exacerbated by aggressive rollout plan (12-13 stores on a base of 55 SS stores). Thus, standalone operating margin (5.2% in FY13) is unlikely to improve in FY14. We lower our standalone FY14/FY15 margin estimate by 20/40 bps to 5.3%/5.8%. Also, debt burden will increase (D/E at 1x in FY14E). We have lowered our standalone earnings estimate by 14%/18% to Rs 506 mn/Rs 760 mn for FY14E/FY15E. Our SoTP based TP is reduced to Rs 311/share (departmental store at Rs 220 based on 24x FY15E P/E; HyperCity at Rs 92 based on 1x FY15E EV/Sales) from Rs 325 earlier. We maintain SELL with a downside of 20% from CMP of Rs 389. Key highlights from the management interaction  Like to Like (LTL) growth in Q1 at low double digit; but 8% target maintained for FY14: No visible demand triggers to warrant a higher LTL growth.  Operating margin to remain weak at 5.3% in FY14 (4-yr average 7%), due to aggressive rollout of 12 stores (on base of 55). In order to see a meaningful expansion in operating margin, LTL growth needs to be above 12% to offset losses of new stores and ~7% p.a. increase in operating cost.  Short term cash flow mismatch; Debt and interest cost to increase: Consolidated operating cash flow of Rs 1 bn will be insufficient to meet cash outflow of Rs 1.7 bn in FY14. We expect D/E to subsequently decline in FY16 to 0.7x from 1x in FY14.  Key initiatives to turnaround HyperCity: (1) Resizing and new compact store format to reduce cost structure, (2) Increase apparel share, (3) Stringent cost control and (4) Driving value proposition through aggressive marketing. 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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