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SHOPPERS STOP
Win win deal for both Amazon and SSL
India Equity Research| Retail
Structural shifts (demonetisation and GST) in India’s retail space have EDELWEISS 4D RATINGS
seen Shoppers Stop (SSL) realign its business strategy wherein: 1) To
Absolute Rating BUY
capitalise on the digital wave, SSL has announced an exclusive tie up with
Rating Relative to Sector Outperformer
Amazon India, which attracts ~600mn eyeballs, a big potential customer Risk Rating Relative to Sector Low
base for SSL; 2) This partnership will see Amazon leverage SSL’s physical Sector Relative to Market Underweight
space, while SSL will utilise Amazon’s widespread digital presence to
create a superlative retail omni‐channel; and 3) SSL has raised
~INR1,793mn by divesting 5% stake to Amazon India and will use the sale MARKET DATA (R: SHOP.BO, B: SHOP IN)
proceeds to pare debt. Amazon India & Shoppers Stop tie up and the exit CMP : INR 418
of Aditya Birla Group from its online platform (abof closed) shows huge Target Price : INR 670
52‐week range (INR) : 452 / 265
relevance of physical retailing in India. Maintain ‘BUY’.
Share in issue (mn) : 88.0
M cap (INR bn/USD mn) : 37 / 573
A win‐win tie‐up … Avg. Daily Vol.BSE/NSE(‘000) : 91.2
The SSL‐Amazon India tie‐up, in our view, places SSL at vantage point to reap benefits
from its partner’s enviable digital presence wherein: 1)SSL management expects SHARE HOLDING PATTERN (%)
INR2bn sales from digital post the tie up with Amazon and 6‐8% EBITDA margin in
Current Q4FY17 Q3FY17
FY19; 2) We expect SSL to leverage Amazon India to increase its private label Promoters * 63.3 67.1 67.1
contribution (16.4% in Q1FY18); and 3) SSL has allotted 4.39mn shares (divested ~5%
MF's, FI's & BK’s 12.7 13.4 13.4
stake) to Amazon India at INR407.78/share aggregating to ~INR1,793mn. Having
FII's 4.1 4.3 4.2
Amazon India as an investee will boost confidence of SSL’s investors.
Others 19.9 15.1 15.4
* Promoters pledged shares : 8.8
…likely HyperCity divestment, will drive further rerating of stock (% of share in issue)
As per media reports, Future Retail is looking to acquire HyperCity at INR10bn
PRICE PERFORMANCE (%)
enterprise value (EV) which will be a positive for SSL. Consequently, we expect SSL to
EW Retail
sharpen focus on its departmental business and also utilise the sale proceeds to pare Stock Nifty
Index
debt (SSL’s debt stood at INR4,920mn in Q1FY18). We assign 0.4x FY19E EV/sales
1 month 18.2 1.1 2.3
which implies EV of INR2,604mn for 51% stake.
3 months 22.3 4.1 7.0
12 months 11.0 12.8 17.1
Outlook and valuations: Headed in right direction; maintain 'BUY'
SSL is well placed as: 1. omni channels will receive a boost post its tie up with Amazon;
and 2. Funds raised through Amazon will be used to cut debt. Hence, we raise our
standalone business multiple to 1.3x EV/sales FY19E (earlier 0.9x), while maintaining
our 0.4x EV/sales FY19E multiple for HyperCity to arrive at revised SoTP‐based target
price of INR670 (earlier INR429). At CMP, the stock is trading at 10.7x FY19E Abneesh Roy
EV/EBITDA. We maintain ‘BUY/SO’. +91 22 6620 3141
abneesh.roy@edelweissfin.com
Financials
Year to March FY16 FY17 FY18E FY19E Rajiv Berlia
Revenues (INR mn) 44,320 49,101 57,115 63,470 +91 22 6623 3377
Rev. growth (%) 3.4 10.8 16.3 11.1 rajiv.berlia@edelweissfin.com
EBITDA (INR mn) 1,791 1,743 2,665 4,104 Alok Shah
Adjusted Profit (INR mn) (403) (655) 624 1,263 +91 22 6620 3040
alok.shah@edelweissfin.com
Adjusted Diluted EPS (INR) (4.8) (7.9) 7.1 14.4
Diluted P/E (x) (86.6) (53.3) 58.8 29.1
EV/EBITDA (x) 24.3 25.4 16.7 10.7 September 25, 2017
Edelweiss Research is also available on www.edelresearch.com,
Bloomberg EDEL <GO>, Thomson First Call, Reuters and Factset. Edelweiss Securities Limited
Retail
Spoke to Shoppers Stop | Exclusive tie‐up with Amazon India
Amazon India will have an exclusive SSL fashion web page.
Amazon India is barred to have similar tie ups with other brick and mortar stores like
Central, Pantaloons, Westside and Reliance Retail.
Similarly, SSL too cannot enter into tie‐ups with other ecommerce players.
Amazon India has the right to open experience stores (which lets customers test the
products available online) at SSL’s outlets.
Amazon India will provide marketing, promotion and visibility support to promote sale
of products of SSL on Amazon.in.
The deal only relates to the departmental store. SSL can still divest its stake in
HyperCity.
Management expects INR2bn sales from digital post the tie up with Amazon with 6‐8%
EBITDA margin in FY19.
Our view
In the past 2 years, SSL has been investing in it omni venture. We believe this exclusive tie‐
up will lend the required fillip to its omni platform. Amazon India attracts ~600mn hits,
which will be a potential customer base for SSL. The partnership will leverage SSl’s brand
assortment and Amazon India reach to create a superlative omni‐ channel retail experience
for consumers across the country. Moreover, SSL’s website, shoppersstop.com, will continue
as per the initial plan.
Allotment of preferential shares to Amazon India
On September 23, SSL allotted 4,395,925 shares at INR407.78/share aggregating to
~INR1,793mn.
This will lead to Amazon India holding ~5% stake in SSL.
Amazon India does not have the right to appoint a director on SSL’s board.
The allotment will be subject to receipt of necessary approval from the shareholders
and regulatory approvals, if any.
SSL has proposed to hold an extraordinary general meeting October 18, 2017 to seek
shareholders’ approval for the deal.
Private label contribution to improve post tie‐up with Amazon
SSL had initiated several measures to improve its private label contribution. However, its
private label contribution stood at 16.4% in Q1FY18.
Pertinently, private labels fetch higher margins, greater customer loyalty, clear product
differentiation and higher bargaining power with suppliers. Globally, the general
merchandise retailers operate at a private label mix of ~35%, the corresponding figure for
the Indian retail industry currently stands at ~20%. Following the tie‐up with Amazon India,
we expect SSL to enhance focus on its own private label.
2 Edelweiss Securities Limited
Shoppers Stop
Chart 1: Private label contribution
22.0
20.0
18.0
(%)
16.0
14.0
12.0
Q1FY17
Q2FY17
Q3FY17
Q4FY17
Q1FY16
Q2FY16
Q3FY16
Q4FY16
Q1FY18
Private + exclusive label mix
Source: Edelweiss research
Future Retail to buyout HyperCity | Await official announcement
About the deal
As per media articles, as per the deal HyperCity’s INR2,500mn debt will move to Future
Retail. Further it will also receive INR2,500mn in cash while the remaining INR5,000mn
in Future Retail shares.
Overall, HyoerCity’s acquisition price will be INR2,500mn + INR2,500mn + INR5,000mn
= INR10,000mn.
Status
Currently, SSL holds ~51% stake HyperCity, which has 19 stores in India and ~1.4mn sq
ft of retail space.
SSL expects 8‐10% YoY HyperCity growth in FY18.
Expects to improve store level EBITDA in FY18.
SSL expects EBITDA to be profitable at company level in FY18.
SSL will chase PAT profitability in FY19.
HyperCity has debt of INR3,270mn.
Our view
As per media reports, valuation at INR10bn will be a positive for SSL. We value HyperCity on
EV/sales basis and assign 0.4x FY19E EV/sales which gives it EV of INR2,604mn for 51% stake.
We expect it to breakeven in FY20 instead of FY19 as guided by management. Further, funds
raised through sale of HyperCity could be used to reduce debt (Shoppers City had debt of
INR4,920mn in Q1FY18) and increase focus on its departmental business.
3 Edelweiss Securities Limited
Retail
Table 1: HyperCity financials
Year to March FY15 FY16 FY17 FY18E FY19E
Net revenues 10,590 9,787 11,794 11,712 12,766
Cost of materials 7,385 7,441 8,693 9,252 9,370
Gross profit 3,205 2,346 3,101 2,460 3,396
Employee expenses 694 768 1,014 1,007 1,098
Rent expense 530 563 651 644 689
S G &A expenses 1,237 1,289 1,617 1,640 1,749
Total operating expenses 2,461 2,621 3,282 3,291 3,536
EBITDA 744 (275) (181) (832) (140)
Depreciation & amortization 288 291 323 316 332
EBIT 456 (566) (504) (1,148) (472)
Less: Interest Expense 385 442 465 350 350
Add: Other income 64 136 129 150 200
Add: Prior period items ‐ ‐ ‐ ‐ ‐
Add: Exceptional items ‐ ‐ ‐ ‐ ‐
Profit before tax 135 (872) (840) (1,348) (622)
Less: Provision for Tax ‐ ‐ ‐ ‐ ‐
Less: Minority Interest ‐ ‐ ‐ ‐ ‐
Add: Share of profit from associates ‐ ‐ ‐ ‐ ‐
Reported Profit 135 (872) (840) (1,348) (622)
Less: Prior Period (Net of Tax) ‐ ‐ ‐ ‐ ‐
Less: Exceptional Items (Net of Tax) ‐ ‐ ‐ ‐ ‐
Adjusted Profit 135 (872) (840) (1,348) (622)
Source: Edelweiss research
Outlook and valuation: Positive; maintain ‘BUY’
SSL is one of the best run retail companies and envisaged to reap benefits of its expansion
strategy. We expect SSS growth to be aided by normal monsoon and improvement in
discretionary spends led by implementation of OROP and Seventh Pay Commission coupled
with direct benefit transfers. The company has maintained momentum in its retail space
expansion even amidst slowdown, which will aid future growth (to open at least 3‐4 SSL
departmental stores per annum). SSL’s omni channel strategy to counter online competition
is on track. Space rationalisation in HyperCity, higher fashion mix benefits and better
assortments will help bring back growth in HyperCity (to clock company‐level EBITDA
breakeven by Q4FY18).
Also, the government’s directive (press note 3) is aimed at curbing irrational discounts by
online players. Stress in many online players is a positive for physical retailers. However,
entry of single brand retailers such as H&M, Forever21 and heightened competitive
intensity following acquisition of Myntra by Flipkart will remain key monitorables.
In our view, SSL is well strategised to galvanise future growth as: 1. SSL’s investments in
omni channels (expected to be implemented by Sept‐Oct 2017) will receive a boost post its
tie up with Amazon India; 2. Funds raised through preferential allotment to Amazon India
will be used to cut debt; and 3. Expected divestment in HyperCity will result in undivided
focus on departmental business. Further, FY19 EPS has increased by 28.4% YoY due to sharp
cut in interest cost. Hence, we raise our standalone business multiple to 1.3x (earlier 0.9x)
EV/sales FY19E (other retail stocks have massively rerated), while maintaining our 0.4x
4 Edelweiss Securities Limited
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EV/sales FY19E multiple for HyperCity to arrive at our revised SoTP‐based target price of
INR670 (earlier INR429). We maintain ‘BUY/SO’.
Table 2: Target price
Per share
FY19E Methodology Target multiple contribution
Shoppers stop Sales 49,430 EV/Sales 1.3x 64,258
Hypercity (51%) Sales 6,511 P/S 0.4x 2,604
EV (INR mn) 66,863
less debt (INR mn) 9,327
add: cash + investments (INR mn) 1,344
Net cash (INR mn) 58,880
No of shares (mn) 88
Value of share (INR) 670
Source: Edelweiss research
5 Edelweiss Securities Limited
Retail
Company Description
SSL, part of the K Raheja Group of Companies, is a focused luxury segment department store
player. It has presence in high opportunity segments like home improvement through Home
Stop; infant and mothers to be care through Mothercare (a franchise with Mothercare PLC);
cosmetics and beauty care through M.A.C. and Clinique (a retail agreement with Estee
Lauder); the books and music space through Crossword; and in airport retailing through a JV
with Nuance from Switzerland. It also acquired majority stake in HyperCity, a hypermarket
venture promoted by a group company which focuses on mass segment of retailing.
Shopper’s Stop Ltd along with its associate companies HyperCity Retail (India) Ltd and
Timezone Entertainment Pvt. Ltd operates more than 5mn sq ft in the country.
Investment Theme
The Indian retail landscape is evolving with interplay of several demographic and economic
factors. The big opportunity lies in the growing share of organised retail with the growing
trend among consumers to allocate a larger share of income to consumption and gradual
improvement in lifestyle. The improving liquidity is also positive as it means better delivery
of retail space for expansion. SSL is a niche play with strong brand position in the lifestyle
space. It has assiduously positioned itself as a retailer since 1991 of superior quality
products and services, offering an international shopping experience. This strong positioning
and brand recall gives the company a strategic advantage in the light of increasing
competition. With its steadfast focus on systems and processes and its ability to attract
global brands as venture partners, it is well placed to emerge as a leading departmental
store player in the long run.
Key Risks
Store rollout delays
A large number of retailers are facing delays in roll outs due to delays by developers. This is
a significant risk and can lead to cost overruns. Additionally, delays can also lead to capital
crunch with a large number of stores bunching up.
Increased competition
Pressure on margins due to cost escalation and competition
Escalation in lease rentals
Escalation in lease rentals and administration expenses can impact margins.
6 Edelweiss Securities Limited
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Financial Statements
Key assumptions Income statement (INR mn)
Year to March FY16 FY17 FY18E FY19E Year to March FY16 FY17 FY18E FY19E
GDP(Y‐o‐Y %) 7.2 6.5 7.1 7.7
Net revenues 44,320 49,101 57,115 63,470
Cost of materials 28,632 31,892 36,859 39,818
Inflation (Avg) 4.9 4.5 4.0 4.5
Gross profit 15,687 17,210 20,256 23,653
Repo rate (exit rate) 6.8 6.3 5.8 5.8 Employee expenses 3,330 3,886 4,284 4,760
USD/INR (Avg) 65.0 67.5 66.0 66.0 Rent expense 3,830 4,285 4,969 5,522
Company assumptions Advertisement & sales costs 1,146 1,181 1,371 1,523
Revenue growth (Y‐o‐Y %) 0.1 0.1 0.1 0.1 Electricity expenses 1,210 1,282 1,485 1,650
Shoppers ‐ SSS growth (%) 8.5 3.1 9.0 9.0 S G &A expenses 4,381 4,833 5,483 6,093
Departmental store ‐ Total No. of stores 77 80 85 90 Total operating expenses 13,897 15,467 17,591 19,549
EBITDA 1,791 1,743 2,665 4,104
Departmental store ‐ New store addition 5 4 5 5
Depreciation & amortization 1,297 1,510 1,681 1,935
HyperCity gross sales growth (%) 2.9 15.5 9.0 9.0
EBIT 494 233 983 2,169
Cost assumptions 0.1 0.1 0.1 0.1
Less: Interest Expense 848 874 900 920
Shoppers ‐ COGS as % of sales 64.2 64.8 64.1 63.9 Add: Other income 260 251 250 300
HyperCity COGS as % of sales 76.0 73.7 79.0 73.4 Add: Exceptional items ‐ (128) ‐ ‐
Overall Staff costs as % of sales 7.1 7.5 7.5 7.5 Profit before tax (95) (518) 333 1,549
Overall A&P as % of sales 2.5 2.3 2.4 2.4 Less: Provision for Tax 334 203 290 511
Overall Electricity expenses as % of sales 2.6 2.5 2.6 2.6 Less: Minority Interest ‐ ‐ (660) (305)
Add: Share of profit from associates 25 (63) (80) (80)
Rent and lease expenses as % of sales 8.2 8.3 8.7 8.7
Reported Profit (403) (784) 624 1,263
Financial assumptions 0.1 0.1 0.1 0.1
Less: Exceptional Items (Net of Tax) ‐ (128) ‐ ‐
Standalone Tax rate (%) 41.7 41.8 42.0 42.0 Adjusted Profit (403) (655) 624 1,263
Overall Depreciation as % of gross block 18.6 20.3 10.2 10.2 No. of Shares outstanding (mn) 83 83 88 88
Overall Debtor days 6 4 4 4 Adjusted Basic EPS (4.8) (7.9) 7.1 14.4
Overall Inventory days 64 62 62 62 No. of Dil. shares outstanding (mn) 83 83 88 88
Overall Payable days 57 52 52 52 Adjusted Diluted EPS (4.8) (7.9) 7.1 14.4
Adjusted Cash EPS 10.7 10.2 26.2 36.4
Overall Capex (INR mn) (4,163) 621 2,273 1,930
Dividend per share (DPS) 1.5 ‐ 2.1 4.3
Dividend Payout Ratio (%) (31.1) ‐ 30.0 30.0
Common size metrics‐ as % of net revenues
Year to March FY16 FY17 FY18E FY19E
Cost of materials 64.6 65.0 64.5 62.7
Employee expenses 7.5 7.9 7.5 7.5
Rent and lease 8.6 8.7 8.7 8.7
S G &A expenses 9.9 9.8 9.6 9.6
Total operating expenses 31.4 31.5 30.8 30.8
Depreciation and Amortization 2.9 3.1 2.9 3.0
Interest expenditure 1.9 1.8 1.6 1.4
EBITDA margin 4.0 3.5 4.7 6.5
EBIT margin 1.1 0.5 1.7 3.4
Net profit margins (0.9) (1.3) (0.1) 1.5
Growth metrics
Year to March FY16 FY17 FY18E FY19E
Revenues 3.4 10.8 16.3 11.1
EBITDA (33.2) (2.7) 52.9 54.0
PBT (112.2) (448.0) 164.3 364.4
Adjusted Profit (195.0) (62.7) 195.2 102.3
EPS (194.8) (62.7) 190.5 102.3
7 Edelweiss Securities Limited
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Free cash flow Valuation parameters
Year to March FY16 FY17 FY18E FY19E Year to March FY16 FY17 FY18E FY19E
Reported Profit (403) (784) 624 1,263 Adjusted Diluted EPS (INR) (4.8) (7.9) 7.1 14.4
Add: Depreciation 1,297 1,510 1,681 1,935 Y‐o‐Y growth (%) (195.0) (62.7) 190.5 102.3
Interest (Net of Tax) ‐ ‐ 603 616 Adjusted Cash EPS (INR) 10.7 10.2 26.2 36.4
Others 591 1,041 (613) (301) Diluted PE Ratio (P/E) (x) (86.6) (53.3) 58.8 29.1
Less: Changes in WC (69) 463 170 144 Price to Book Ratio (P/B) (x) 6.8 7.3 5.3 4.7
Operating cash flow 1,554 1,304 2,124 3,369 Enterprise Value / Sales (x) 1.0 0.9 0.8 0.7
Less: Capex (4,163) 621 2,273 1,930 Enterprise Value / EBITDA (x) 24.3 25.4 16.7 10.7
Free cash flow 5,717 683 (148) 1,439 Dividend Yield (%) 0.4 ‐ 0.5 1.0
8 Edelweiss Securities Limited
Shoppers Stop
Additional Data
Directors Data
Chandru L. Raheja Chairman B. S. Nagesh Vice Chairman
Ravi C. Raheja Non Executive Director Neel C.Raheja Non Executive Director
Nitin J. Sanghavi Director Deepak Ghaisas Director
Nirvik Singh Director Gulu L. Mirchandani Director
Shahzaad Dalal Director
Auditors ‐ Deloitte Haskins & Sells, Mumbai
Top 10 holdings
Perc. Holding Perc. Holding
Cape Trading Pvt Ltd 12.44 Anbee Construction Pvt Ltd 12.44
Reliance Capital Trustee Co Ltd 9.31 Capstan Trading Pvt Ltd 6.54
Casa Maria Properties Pvt 6.29 Icici Prudential Life Insurance 4.45
Birla Sun Life Asset Management 4.08 Miraj Marketing Pvt Ltd 2.76
Zodiac Clothing Company 1.69 Lombard Odier & Cie 1.59
*as per last available data
Bulk Deals
Data Acquired / Seller B/S Qty Traded Price
31 Mar 2017 Raghukool Estate Developement Llp Sell 2670000 360.00
31 Mar 2017 Casa Maria Properties Llp Sell 2660000 360.00
31 Mar 2017 Anbee Constructions Llp Buy 3874639 360.00
31 Mar 2017 Capstan Trading Llp Sell 2670000 360.00
31 Mar 2017 Cape Trading Llp Buy 4125361 360.00
*in last one year
Insider Trades
Reporting Data Acquired / Seller B/S Qty Traded
07 Apr 2017 Casa Maria Properties LLP Sell 2660000.00
07 Apr 2017 Cape Trading LLP Buy 4125361.00
07 Apr 2017 Raghukool Estate Development LLP Sell 2670000.00
07 Apr 2017 Capstan Trading LLP Sell 2670000.00
07 Apr 2017 Anbee Constructions LLP Buy 3874639.00
*in last one year
9 Edelweiss Securities Limited
RATING & INTERPRETATION
ABSOLUTE RATING
Ratings Expected absolute returns over 12 months
RELATIVE RETURNS RATING
Ratings Criteria
Sector Outperformer (SO) Stock return > 1.25 x Sector return
Sector return is market cap weighted average return for the coverage universe
within the sector
RELATIVE RISK RATING
Ratings Criteria
SECTOR RATING
Ratings Criteria
Overweight (OW) Sector return > 1.25 x Nifty return
10 Edelweiss Securities Limited
Shoppers Stop
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Board: (91‐22) 4009 4400, Email: research@edelweissfin.com
ADITYA
Digitally signed by ADITYA NARAIN
DN: c=IN, o=EDELWEISS SECURITIES LIMITED,
Aditya Narain ou=HEAD RESEARCH, cn=ADITYA NARAIN,
serialNumber=e0576796072ad1a3266c27990f
20bf0213f69235fc3f1bcd0fa1c30092792c20,
Head of Research
NARAIN
postalCode=400005,
2.5.4.20=3dc92af943d52d778c99d69c48a8e0c
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aditya.narain@edelweissfin.com st=Maharashtra
Date: 2017.09.25 08:40:13 +05'30'
Coverage group(s) of stocks by primary analyst(s): Retail
Aditya Birla Fashion and Retail Ltd, Future Lifestyle Fashions Limited, Future Retail, Jubilant Foodworks, Shoppers Stop, Titan Company, Wonderla
Holidays
Recent Research
Date Company Title Price (INR) Recos
12‐Sep‐17 Future Same store sales surpass 396 Buy
Lifestyle peers;
Fashion Result Update
10‐Aug‐17 Wonderla Steady show; spade work on 340 Buy
Holidays Chennai park gets going;
Result Update
08‐Aug‐17 Future Extends stellar streak; 443 Buy
Retail Result Update
Distribution of Ratings / Market Cap
Edelweiss Research Coverage Universe Rating Interpretation
Buy Hold Reduce Total Rating Expected to
Rating Distribution* 161 67 11 240 Buy appreciate more than 15% over a 12‐month period
* 1stocks under review
Hold appreciate up to 15% over a 12‐month period
> 50bn Between 10bn and 50 bn < 10bn
Reduce depreciate more than 5% over a 12‐month period
Market Cap (INR) 156 62 11
One year price chart
500
450
400
(INR)
350
300
250
Apr‐17
Sep‐16
Feb‐17
Sep‐17
Mar‐17
Jun‐17
Dec‐16
Jul‐17
Oct‐16
Aug‐17
Nov‐16
May‐17
Jan‐17
Shoppers' Stop
11 Edelweiss Securities Limited
Retail
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12 Edelweiss Securities Limited
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