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Analyst Research Report Snapshot


Shoppers Stop (SHOP) - Qtr. Update - Dated - April 30, 2014




Axis Capital Limited


02 May 2014





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While Shoppers Stop (Bloomberg: SHOP IN) standalone Q4 operating margin of ~5% was below our estimate of 6% (lower gross margin and retail expansion-led cost inflation), like to like (LTL) volume growth of 6.5% gives comfort on improving demand. We expect EBITDA margin to improve 70 bps over next 2 years to 6% on improving sales throughput and slower pace of expansion. However, improving departmental store profitability will be diluted to a certain extent by sustained losses in HyperCity (51% subsidiary), which has pushed up investment from parent and increased debt. We revise downwards our standalone earnings by 8%/16% in FY15E/FY16E to factor in higher interest expense. Our SoTP-based TP stands revised to Rs 348 (Rs 368 earlier). Maintain HOLD. At CMP of Rs 366, our TP implies a downside of 5%. Key highlights  Consumption seeing a turnaround; margin expansion on cards: Better consumer sentiments aided 8.4% LTL growth in departmental stores, despite a high base. Moreover, the management mentioned that April sales have also recorded a similar magnitude of growth. While the fine jewellery category continues to struggle, growth across apparel (63% of sales) segments has been robust. Greater focus on increasing private label share (400 bps over next 2 years) and lower store rollout (8 stores p.a) will aid margin expansion  HyperCity in consolidation phase; losses to sustain: Management is undertaking several initiatives to boost profitability such as exiting low margin electronic products, resizing stores (~15% of unproductive retail space returned), increasing fashion share (currently 13%) and expansion through smaller format stores (lower cost structure). Given future expansion plans, we believe operating losses will sustain over next 2 years, unless there is a drastic improvement in consumption environment which could augment store level operating profitability Regards, Hemant Patel (ED – Consumer) Institutional Equity Research Axis Capital Ltd Tel: +91 22 4325 1105 Shiv Nanda (AVP- Consumer) Institutional Equity Research Axis Capital Ltd Tel: +91 22 4325 1124

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