Shoppers Stop

Praxis Business School

Project No. 1

Financial Analysis of Shoppers Stop

A report

Submitted to

Prof. Uday Damodaran

In partial fulfillment of the requirements of the course

Financial Management

On 15-02-08

By

Amit Kumar- B07005

Anupam Agrawal- B07008

Shashank Vyas- B07038

Company Profile:	Shoppers’ Stop Ltd
Ticker:	532638
Exchanges:	BOM
2007 Sales:	8,112,800,000
Major Industry:	Retailers
Sub Industry:	Apparel Store Chains
Country:	INDIA
Employees:	3159

Business Description Shoppers’ Stop Ltd. The Group’s principal activities are to provide retail range of branded and own label apparel, footwear, perfumes, cosmetics, jewellery, leather products and accessories, home products, books, music and toys. It operates through 23 stores located in the cities of Mumbai, Delhi, Kolkata, Chennai, Bangalore, Hyderabad, Pune, Jaipur and Gurgaon. Apart from the department store chain –Shoppers’ Stop (23 stores), the company has forayed into specialty stores for books – Crossword Book Store (41 outlets), home décor – Home Stop (2 stores) and in cosmetics and maternal care through exclusive retail agreements with international brands like M.A.C. and Mother care (11 stores) respectively. Shopper’s Stop Limited also ventured in the Food & Beverages business by opening Brio – the café bistro (12 outlets) and Desi Café. The Company is occupying an aggregate area of 1,152,590 sq. ft. and Crossword Bookstores Ltd. occupies additional 201,890 sq ft.

Investment highlights

o Aggressive store rollout

SSL has set for itself an aggressive retail expansion target of rolling out 79 stores from the current 60, across its various store formats by FY09. It had raised Rs.1528m from its IPO to part fund this expansion. This expansion will mark the entry of the company into Tier II cities like Pune and Ghaziabad and also its foray into the bell weather value-retailing segment with hyper city. The store rollout will broaden the company’s target customer group and widen its presence across retailing formats.

o Diversification of business to add value

SSL’s initiative to expand into different retail formats like hypermarkets and specialty stores in addition to its departmental store business will add significant value to the company. Though the revenue contribution from these new formats will be small in comparison to the existing business we expect the new divisions to add close to 30% to the profits of the company from FY07.

o Strong loyalty base

SSL has one of the most successful loyalty programmes, which has resulted in its First Citizen member’s base increasing to 644,500, in Q1FY07 from around 400,000 in FY05. Their contribution to sales has seen an upward spike from 50% in FY05 to 63%. This loyalty group gives SSL a competitive advantage in terms of repeat business.

o The organized retail advantage

The Indian domestic market has become an economic powerhouse with its large young working population, burgeoning disposable income levels, and emerging opportunities in the services sector.

Going forward, organized retailing is projected to grow at the rate of 25-30% and is estimated to reach an astounding Rs.1, 000 bn by 2010

Financial Highlights

Year	Mar 07	Mar 06	Mar 05	Mar 04	Mar 03
Interest Cover Ratio	12.07	16.54	6.33	2.92	4.36
Operating Profit Margin (%)	8.75	8.37	6.63	6.78	6.52
Adjusted Net Profit Margin (%)	2.91	4.00	3.75	2.99	3.53
Return On Capital Employed (%)	14.42	16.79	15.19	14.47	12.37
Return On Net Worth (%)	9.27	14.87	21.22	14.30	15.40

Asset Turnover ratio (%) 2.15 2.03 2.75 2.88 -

Company is making good profits over the years; its interest coverage ratio has improved, they are in good position to pay off their interest expenses. Its return on capital is more than its cost of capital; also it is more than the industry returns.

Its return on net worth has decreased significantly over the period as they had opened few new stores across India but they had not able to reap profit out of it due to which their profit reduced over the last year but still they managed to get better profit than its competitors.

If we look at the asset turnover ratio, company has not properly utilised its asset over the years, as pantaloons and other player in the industry has asset turnover ratio of around 4- 5%.

Value Creation of Shoppers Stop

RONW

TYPE	2007	2006
RONW	8.88	10.06
COST OF EQUITY	23.122	17.29

Company has not created value as its Cost of Equity is more than RONW. This was one way of finding whether they had created value or not. Let see if other method will help us to find if company had created value.

WACC

TYPE	2007	2006
% Equity	.95	.98
% Debt	.05	.02

ROCE

TYPE	2007	2006
ROCE	0.26	0.27
WACC	.2231	.1704

Company has created value as its ROCE is more than WACC. We had taken market value of the equity and calculated debt ratio with it for the calculation of ratio with debt.

EVA
Year	ROCE-WACC
2006	9.3984
2007	3.93505

EVA shows the true economic profit of a corporation. These are EVA of the company for the year 2006 and 2007. So the company had created value in both the years. It was less in 2007 because of low ROCE. Here ROCE has been calculated by using PBIT with capital employed. Here opportunity cost of capital is less then returns of the business.

Competition Analysis

Strategies Adopted Over Time By Shoppers’ Stop To Tackle Competition:

I) Market has changed: marketing has not

Fortunately the principles behind building bonds with the customer have not really changed. The way to the customer’s mind (and therefore his wallet) and the dynamics of maintaining the novelty in a relationship have definitely changed and changed rather irrevocably. However, the basic tenets of identifying a customer and making him feel special have remained the same thus providing some continuity to the ‘old school of marketing’. What are these basic rules or guidelines which could provide some comfort to the brand manager on this perilous journey to the land of loyalty?

Rule No 1: Know thy customer!

Rule No 2: Divide and Lure (with apologies to the British Empire!)

Rule No 2.1: Pamper the best:

Rule No 2.2: Honour the rest

Rule No 3: Reward do build loyalty!

Rule No 4: Show that you care:

Rule No 5: Designing products to make their customer’s life better:

Rule No 6: Don’t look now; the customer is changing

Rule No 7: Put the customer in charge

SWOT analysis

For assessing the advantages and disadvantages shopper stop enjoys as compared to its peers we have gone in to SWOT analysis of the company.

STRENGHTS:

o Pioneer in departmental format.

o Loyal customer base accounts for 63% of revenue.

o Low risk and sturdy business model.

o Presence across retail segments; lifestyle, value and specialty retailing.

o Healthy financial position with low gearing.

o Low rentals due to long lease contracts.

WEAKNESS:

o Late foray into value retailing with 51% stake in promoter owned company.

o High spend on store makeovers and interiors to ensure pleasant shopping experience.

o Competition from standalone specialty stores.

OPPURTUNITY:

o 30% CAGR in organized retailing to result in better footfalls and conversion rates.

o Entry into TIER II and III cities.

o Benefit from the 16% increase in discretionary spend in Indian consumers because of presence across formats.

o Collaborations with foreign players because of a national brand.

THREATS:

o Impact of slowdown in consumer spends to be felt on department stores.

o Opening up of economy for free entry of foreign retail players.

o Employee shortage due to rapid growth in retailing.

Volatility of SALES

As we can see % of sales was dropping till 2006 but after that company seems to be more stable and less risky.

Revenue of the company is increasing over the years. This signifies that company is trying to increase their market share and with the increasing consumption. It sales has increased very steeply over the years.

EBIT

Same is the case with EBIT, it is also volatile and showing a decreasing pattern over the years.

In qualitative terms their EBIT is increasing over the years, due to increase in turnover over the years.

Equity risk

Equity risk is the risk that one’s investments will depreciate because of stock market dynamics causing one to lose money.

The measure of risk used in the equity markets is typically the standard deviation of a security’s price over a number of periods. The standard deviation will delineate the normal fluctuations one can expect in that particular security above and below the mean, or average.

Years	2007	2006	2005
Standard Deviation	56.39	73.47	30.75

Equity risk is very high as its standard deviation is very high. It is not a stable stock. But the stock is getting stable as its standard deviation is reducing over the years.

Operating Leverage

YEAR	2002	2003	2004	2005	2006	2007
EBIT	55	138	170	246	426	531
SALES	2402	2949	3953	5001	6660	8850
DOL		0.151737	0.031873	0.072519	0.108499	0.047945

EBIT’s percentage change as a result of a change of one percent in the level of output is low. Company’s fixed asset is increasing over the years whereas sales remain at the same level.

Financial leverage

In finance, leverage is the general term used to describe the ratio between an investor’s market exposures to borrowed funds.

The higher a firm’s financial leverage, the riskier the firm’s operations are considered to be. The most typical system of determining an acceptable level of financial leverage is by comparing operations to others firms in the same industry.

Because a firm must continue to make payments on debt no matter what the business climate, firms with higher leverage are generally considered more susceptible to economic downturns. But financial leverage may also increase an investor’s returns. Lower leverages suggest financial leeway that may sustain operations when business turns.

Degree of financial leverage = % ∆ in EPS / % ∆ in EBIT

YEAR	2003	2004	2005	2006	2007
%∆ in EBIT	150.9091	23.18841	44.70588	73.17073	24.64789
%∆ in EPS	12.64	-45.3865	216.895	13.54467	-4.56853
DFL	0.083759	-1.95729	4.851599	0.18511	-0.18535

Company is low leveraged as they had taken very low loans. In 2007 company’s EBIT reduced also interest payment marginally increased, so same effect was on EPS.

Finally company has high DOL AND low DFL.

Capital structure of the company

If we look at the debt equity ratio of the company from last 5 years, they had maintained it at a very low level as compare to its competitors.

Debt/Equity

0.30

0.40

0.84

0.75

0.73

This clearly indicates that company keeps more equity in all the 5 years and low debt. It helps company lower down their interest expenses and improves their interest coverage ratio. For getting a competitive edge over its competitors in retail industry, company lower its expenses and increase their cash flow.

Shoppers Stop Finance Committee

o Ravi C. Raheja – Chairman

o Neel C. Raheja – Member

o B.S. Nagesh – Member

Bankers

o UTI Bank Limited

o Citibank N.A.

o IDBI Bank Limited

o ICICI Bank Limited

o Kotak Mahindra Bank Limited

o The Hongkong and Shanghai Banking Corporation Limited

o Calyon Bank

These are the bankers who help company to finance its operation. So company has good support and tie up with major bank of India.

Company has a strong and well-established management team, headed by B S Nagesh, Managing Director. They believe that the CEOs of each business under the guidance of the MD will be the key to successful execution and expansion, and strong business growth.

This clearly indicates the company share distribution across the globe. It will be every easy for the company to raise funds. Strong holding of the Banks and FII’s shows the growth prospect of the company.

Future Estimated Growth Funding

Company can easily manage its funds. Issue of instrument(s) on a rights basis which may include but not limited to shares/ Partly Convertible Debentures/ Fully Convertible Debentures/ Warrants and/or combination thereof for up to an aggregate amount of about Rs. 500 crore and has constituted and authorized a Committee of Directors of the Board to decide inter-alia the modalities of the proposed rights issue including but not limited to determining the price of instrument(s), the proportion and entitlement ratio, the timing and including record date of the issue.

Also Rs. 951.09 million has been kept in fixed deposits with banks pending utilisation.

Company’s debt / equity ratio is very low as compare to other players in the industry. If we look at pantaloons debt/ equity ratio, it was 1.14 on June 2006. So company can any time raise funds from the market for its future expansion. Its promoters Raheja Group and their contact with major bank of India will easily avail those funds for estimated growth.

Operating Efficiency

Company has been performing well. They had maintained their ratios best in the industry. Let’s look at the various ratio of the company and find out whether they had managed it well or not?

o Debtor’s turnover ratio: Company has maintained its debtors at low level. It was 2 from last 5 years and now it’s 3. Company is rotating its money well which will generate higher cash flow. Usually most of their transaction is cash payments, only credit card payment leads to delay in payment.

o Creditor’s turnover: Company has been paying their debt in lag of around 55 days. As we had seen in debtor’s ratio company is receiving its money very fast whereas they are making payment late, this will lead company to maintain better working capital as well as rotate their money faster.

o Stock turnover ratio: Company has implemented various measures to lower down their inventory carrying cost. Shrinkage in the retail business is defined as the loss in inventory through a combination of shop lifting, pilferage, and errors in documentation and transaction processing that go unnoticed. They have focus on inventory control and have set up a separate department called “Profit Enhancement”, which not only monitors Shrinkage on a regular basis but also looks at various factors that could lead to Shrinkage at stores and distribution centres. The Profit Enhancement department, Store Operations along with the Supply Chain team have worked together and monitored the Shrinkage level on a month on month basis which has resulted in the Shrinkage percentage being controlled at 0.46% of the Turnover and our endeavour will always be to lower this ratio through proper monitoring and continuously reviewing Inventory management processes and systems.

o Current ratio: Company had maintained their current ratio at around 3 i.e. they want to keep more of liquid cash with them. Mostly their current ratio blocks at the merchandise which they keep in store and stock in warehouse. Industry standard is 2:1, whereas company had maintained it at 3. Maintaining working capital requirement efficiently is very important in retail business because of the sudden requirement of the cash.

o Operating cash flow, usually more formally described in accounts as “cash inflow from operating activities”, is the amount of actual cash made by a company’s business. It is similar to operating profit but without the non-cash items and accruals.

o Reason for such a low operating cash flow on 06-07 is due higher working capital balance and purchase of fixed asset. Company’s inventory is also high at the yearend due to which its operating cash flow is low.

o Free cash flow is operating cash flows (net income plus amortization and depreciation) minus capital expenditures and dividends. Free cash flow is the amount of cash that a company has left over after it has paid all of its expenses, including investments. Negative free cash flow is not necessarily an indication of a bad company. But in our case company had maintained good free cash flows as working capital requirement is high in retail industry.

Growth Redefined

Shopper’s Stop Ltd. has achieved unparalleled growth to emerge as a competent, strong and dependable organisation. It has spread its equity and ability across a gamut of retail formats by leveraging synergies, specialties and strengths of each business to maximise growth not just within the organisation, but also in the country’s retail sector.

The company’s flagship business of department stores is manifest in Shoppers’ Stop. A pioneer of organized retail in India, Shoppers’ Stop today, is the country’s biggest Department Store Chain. It offers customers an international shopping environment and a world-class shopping experience through its 20 stores in 11 cities. It houses a host of international and domestic brands across categories such as apparel, accessories, cosmetics, home & kitchenware as also its own private brands.

Company continues with various initiatives for bringing down the cost of borrowings which includes application of new dynamic short term instruments so as to have an increase in cash flow, reducing interest cost and improving working capital management.

The growth of the Company has been financed largely through cash generated from operations and IPO proceeds. The cash generated was

Rs. 436.26 million (Excluding payment of long-term lease deposit of Rs. 240.22 million) and cash flow from financing activities was Rs 493.26 million. Fitch Ratings India Pvt. Ltd. has assigned a rating of “F1+ (Ind)” to the Company for short-term debt/commercial paper.

Future Redefined

The time yet to come for Shopper’s Stop Ltd. will be an aggregate of the firm foundation and futuristic foresight that will empower the company to reinforce its offerings to the affluent middle class in India. The future will be a time when Shopper’s Stop Ltd. will evolve as the one name that stands for premium and luxury value for shoppers all over the world.

 

Bibliography:

o www.shoppersstop.com

o www.nse-india.com

o www.wikipedia.com

o www.myiris.com

o www.moneycontrol.com

o www.geojit.com

o www.bseindia.com

o www.investopedia.com