India Equity Research | Retail Monthly Update

RETAIL
Growth improves, expansion slows down March 17, 2009

Pantaloon Retail’s revenues grew 31% in February; SSS sustained

Priya Ayyar
Pantaloon Retail’s (PRIL) monthly sales grew 31% Y-o-Y against 24% in January.
+91-22-4063 5413
Value retail (VR), at INR 3 bn, comprised 56% of total revenues and grew 30%, while
priya.ayyar@edelcap.com
lifestyle retail (LR) at INR 1.7 bn grew 21% and accounted for 32% of revenues. Same
store sales (SSS) growth improved in the month with VR growing at 5% and LR at
4%. However, Home retail (HR) stayed negative at 10%.

PRIL expansion slows down; addition of 0.1 mn sq ft in the month

The company’s space addition slowed down with addition of only one Big Bazaar
(including Food Bazaar), one Brand Factory and one Furniture Bazaar, totaling to 0.1
mn sq ft. The total addition of space till date stands at 1.6 mn sq ft at the consolidated
level and 1.3 mn sq ft at the standalone level. The company has lowered its addition
plans for FY10 in light of the capital crunch and the testing business environment.

Brand strength and inventory management help branded apparel majors

Large branded apparel majors have been impacted by the slowdown in consumption,
and challenging business conditions have brought their margins under pressure.
However, strength of the brands, together with effective discounts and promotional
offers, has aided growth. Also, conservative inventory policies have mitigated any
serious obsolescence risk, and orders for the forthcoming season have been planned
better. This gives the apparel brands an edge over other multi brand apparel focused
retailers who are stuck with non moving stock.

Key developments in the sector

The FDI policy was changed and excluded indirect investment through
domestic companies from overall sectoral ceilings. But foreign investment will
have to comply with the relevant sectoral conditions. It however looks unlikely that
multi brand retail can get foreign capital as per these guidelines.
Future Group looking to rejig business into four separate entities and unlock
value through stake sale. It is examining a structure that would enable it to strike a JV
with a global retailer 
Bharti Retail decides to close 4-5 non-performing ‘Easyday’ stores.
Future Group and Hidesign close to signing JV. They plan to launch an India-
oriented lifestyle brand, Holii, to cater to the mid-to-mass market segments.
Future Group to buy stake in Turtle: The Turtle Group currently operates 32
exclusive outlets across the country with presence in over 1,200 multi-brand stores.
Provogue is likely to invest INR 250 mn on stores expansion by FY10. These
stores will be spread out equally in metros as well as in tier II and tier III cities.
Reliance Retail outlines plans to expand its non-veg retail chain ‘Delight’. It is
looking to add 500 by the end of 2009 and 1,000 by 2010.
Infiniti to open 20 Croma retail stores with an investment of INR 600-800 mn in
2009-10, taking the total number of stores across the country to 50.
Branded apparel companies are investing more in B and C-class markets with
competitive pricing strategies to cash in on their potential.

(The above highlights are based on news articles in leading dailies)

In this update we have included key takeaways from our meeting with Raymond India.

Edelweiss Research is also available on Bloomberg EDEL <GO>, Thomson First Call, Reuters and Factset. Edelweiss Securities Limited

1
 Retail

PRIL: Sales numbers improve; expansion slows

PRIL revenues in February grow 31%; YTD growth at 34%

Total revenues grew 31% to INR 5.3 bn with VR generating 56% of revenues, LR 32% and
HR the remaining. This is an improvement over the 14.6% growth in November and 23.5%
growth in January. VR grew 30%, LR 21% and HR grew 26%.

Chart 1: Total revenue growth at 31% Chart 2: VR grows at 30% and LR at 21%
8,500 150 150

6,800 120 120

(INR mn)

5,100 90 90

(%)

(%)
3,400 60 60

1,700 30 30

0 0 0
Oct-06

Oct-07

Oct-08
Jun-06

Jun-07

Jun-08
Feb-07

Feb-08

Feb-09

Feb‐07

Feb‐08

Feb‐09
Jun‐06

Jun‐07

Jun‐08
Oct‐06

Oct‐07

Oct‐08
Total Total Revenue Growth VR % Y‐o‐Y LR % Y‐o‐Y
 
Source: Company reports, Edelweiss research

SSS growth numbers improve, but pressures visible

The same store sales (SSS) growth improved in the month to 5.3% in VR and dipped to 4%
in LR. HR, however, continued with negative SSS at 10%. This is an improvement over the
negative SSS growth seen across all segments in December. However, the growth numbers
for VR are lower than the YTD growth of 7.4% and the growth in LR has dipped from January
levels. The YTD growth in LR stands at 5.6% and is flat for HR.

Chart 3: SSS improve to 5% in VR Chart 4: LR SSS fluctuate due to promotions

60.0% 40.0%

40.0% 30.0%

20.0%
20.0%
10.0%
0.0%
0.0%
-20.0%
-10.0%

-40.0% -20.0%
Dec-06

Dec-07

Dec-08
Apr-07

Apr-08
Aug-06

Aug-07

Aug-08
Feb-07

Feb-08

Feb-09
Oct-06

Oct-07

Oct-08
Jun-06

Jun-07

Jun-08

Dec-06

Dec-07

Dec-08
Oct-06

Oct-07

Oct-08
Jun-06

Jun-07

Jun-08
Apr-07

Apr-08
Aug-06

Aug-07

Aug-08
Feb-07

Feb-08

Feb-09

   
Source: Company reports, Edelweiss research

Edelweiss Securities Limited

2
 Retail

Space addition of 0.1 mn sq ft lags target

The company added 1 Big Bazaar (including Food Bazaar), 1 Brand Factory and 1 Furniture
Bazaar Factory outlet in February, totaling to 0.1 mn sq ft - way below the December and
January levels. The YTD addition stands at 1.4 mn sq ft at the consolidated level and 9.2 mn
sq ft at the standalone (excluding home solutions) level. The company is looking at lower
spec addition in FY10 as well, given the capital crunch, testing business environment and the
uncertain consumption trends. We expect the company to close FY09 with 10 mn sq ft and
FY10 with 12.2 mn sq ft at the standalone level.

Chart 5: Space addition lags target

500 11.5
11.1
400 11.0 11.0
10.8
10.7 10.7

(mn sq. ft)

300 10.5
('000 sq.ft)

10.5

200 10.1 10.0

9.8

100 9.5

0 9.0
July Aug Sept Oct Nov Dec Jan Feb

Consolidated Standalone Total space

Source: Company, Edelweiss research

Edelweiss Securities Limited

3
 Retail

Key takeaways from discussions with branded apparel players

We spoke to Madura Garments (Madura) and Raymond India (Raymond) to gain insights into
their branded apparel business and understand the challenges they face and the benefit of
their strong brands. Some key takeaways are as follows:

ƒ Revenue growth in the festive quarter (October-December 2008) was below expectations
with Raymond posting a growth of 1% and Madura 6%. However, Raymond posted
positive SSS growth in the quarter at 3%. Discounting attracted a fair amount of serious
shoppers, which led to the branded players performing better than most multi-brand
outlets (MBOs) in terms of like-to-like growth.

ƒ Companies over the last few years have been investing in Exclusive Brand Outlets
(EBOs) in addition to the MBO chain. Several of the new stores added in the nine months
have hit the overall profitability and could take much longer to break even. The slower
demand conditions and high startup cost has led to closure of some unviable stores (both
company operated and franchisee operation). Future expansion is being evaluated
carefully to conserve capital. Madura currently operates 328 stores spread over 0.65 mn
sq ft, while Raymond operates 556 stores across its formats. 

Table 1: Q3 snapshot (INR mn)

Madura Dec-08 Dec-07 % grth 9MFY09 9MFY08 % change

Revenue 2,344 2,215 5.8 6,959 6,034 15.3
EBITDA 60 196 (69.4) 190 425 (55.3)
EBITDA (%) 2.6 8.8 2.7 7.0

Raymond Dec-08 Dec-07 % grth 9MFY09 9MFY08 % change

Revenue 1,460 1,440 1.4 4,060 3,700 9.7
EBITDA 130.0 170.0 (23.5) 429.0 461.0 (6.9)
EBITDA (%) 8.9 11.8 10.6 12.5  
Source: Company, Edelweiss research

ƒ Savings in the form rental renegotiation are expected, but the benefit is yet to accrue.
Also, costs of operations have seen some softening.

ƒ Franchisee stores are doing well and recent competition that had caused some franchises
to shift has died down and some franchisees have come back. The franchisee store
expansion is expected to continue. Madura operates close to 50% of its stores through
franchisees.

ƒ Conservative inventory valuation methods and strong systems have helped branded
apparel majors limit their inventory pile up compared with other retailers dealing
predominantly in apparel. Periodic provisions for obsolescence and effective mix of
fashion and regular merchandise have ensured that the inventory is not outdated and
with promotions and discounts will be cleared out by end of FY09. Additionally, the
sourcing for the next fashion seasons has become prudent.

ƒ Branded players are looking at tier III and IV cities keenly as they have still held up
much better than the metros and tier I cities. Currently, around 50% of Raymond’s
stores are in tier III and lower cities.

ƒ Players expect the pressure on footfalls to continue, but believe serious shoppers will
come at good prices. Hence, the discounting could continue for a while and value brands
like Peter England are expected to grow faster than the premium ones in the near term.

Edelweiss Securities Limited

4
 Retail

Visit Note: Raymond India

Pioneer in branded retail

Raymond India (Raymond) is a leading integrated producer of worsted suiting fabric in the
world, with a capacity of producing 31 mn mtrs of wool and wool-blended fabrics. A pioneer
in the textile and men’s apparel business, the Raymond Group is horizontally and vertically
integrated and offers end-to end solutions for fabrics and garmenting. It has developed a
successful range of brands, appropriately positioned to cater to the expanding base of Indian
consumers whose demand for premium products is steadily on the rise. The company’s
branded apparel business is housed in its subsidiaries Raymond Apparel and Colorplus.
Branded apparel accounts for 22% of the total group revenues.

Attractive brand bouquet

The Raymond Group has an attractive portfolio of brands that have been positioned carefully
to cater effectively to changing trends and emerge as leaders in their respective segments.
Apart from its leading brands Raymonds, Park Avenue, Parx, and ColorPlus, the company has
Zapp!’- an exclusive brand in the kidswear segment. It has also launched ‘Notting Hill’, a
value–for-money brand in the popular price segment.

Manzoni: A luxury lifestyle brand providing the best in contemporary international style & luxury offers a super premium
range of suits, trousers, jackets, shirts, and accessories.

Park Avenue: A premium contemporary formal wear brand and occasion wear brand in India.

Park Avenue Woman: A complete range of Business Wear for working women professionals.

ColorPlus: ColorPlus is among the largest premium category smart casual wear brand in the country.

ColorPlus Woman: An exclusive range of smart-casual clothing accessories.

Parx: A premium casual lifestyle brand comprising a range of semi formal and casual cottons; blends and denim wear

Notting Hill: Notting Hill reflects style and manifests originality of today's fashion-conscious and discerning young
professionals at an affordable price.

Zapp!: A stylish offering children in the age group of 4-12 can choose from a wide range of clothes, and accessories
 
Source: Company

Strong brand positioning

Raymond has invested in these brands over the years and has successfully gained acceptance
as one of the most respected brands in the country. The goodwill has helped it manage the
slowdown in consumption much better than peers and also attract serious customers with
some discounting. It is one of the few brands that have managed to show improvement in
the like–to-like store growth this year. Additionally, the brand strength has attracted and
retained very good franchises, which has strengthened the company’s distribution network.

Edelweiss Securities Limited

5
 Retail

Fig. 1: Group product positioning

Source: Company

Pan-India retail network; franchisee model put to use efficiently

Raymond Group’s products are retailed through ‘The Raymond Shop’ (TRS) and a distribution
network comprising more than 18,000 MBOs and over 500 exclusive retail outlets in more
than 170 cities. It is one of the earliest players to adopt the franchisee model of growth in
India. It has a strong franchisee following with many franchisees operating multiple stores
across brands. This is an indicator of the company’s brand popularity, which has helped it
reach catchments untapped by many other retailers. The strong franchisee group has also
allowed quicker acceptance of new brands.

Raymond has also established international presence with 31 outlets overseas (in the Middle
East, Sri Lanka and Bangladesh). The company through its EBOs has strengthened individual
brand positioning and improved accessibility. Its domestic retail network comprised 556
stores as of December 2008.

Chart 6: Steady store addition

600 600

480 480 165

147 156
(No. of stores)

360
360
(No. of stores)

240
240 391
371 380

120
120

0
0 Q1 Q2 Q3
FY06 FY07 FY08 Dec-08 EBOs TRS
Source: Company

Edelweiss Securities Limited

6
 Retail

Some key numbers

ƒ The company operates 556 stores (Dec 08), covering 1.3 mn sq ft. This includes 391
TRS and 165 other EBOs.

ƒ Its operations span more than 170 cities in the country with around 50% of the stores
in tier III and smaller cities and towns.

ƒ It has added 76 new stores in the last nine months.

ƒ It was looking to operate 1,000 stores by FY11; these plans have, however, now been
reassessed, and focus is on adding stores judiciously in smaller towns.

Focus on smaller towns for growth

Many apparel majors have begun consolidating their operations to derive higher growth rates
from tier-III and below markets. Raymond currently operates around 50% of its stores in
these markets and plans to increase its presence there, as the class three, class four, class
five towns are still holding up very well.

Roughly, organised retail brands and unbranded apparel have proportional market share of
almost 50:50 in metros, while this ratio varies from 80:20 to 90:10 in smaller markets.
Branded majors are now hoping to cash in on this potential at a time when consumption has
dipped.

Integrated model captures demand across value chain

The company’s business model spans the apparel value chain right from fabric to retail. The
Group has seven state-of-the-art textile plants and two garmenting factories in India,
supported by world-class design studios and Italian designers who put together two
collections every year. Strong designing skills complement its brands and retail network.

Fig. 2: Integrated business model

Source: Company

The company has made adequate investments in IT and systems to ensure smooth
operations across segments. This has enabled efficient inventory management and effective
monitoring of franchisee operations which is crucial to ensure consistency in offerings. We
believe that these investments in systems will help the company effectively manage its
working capital and merchandise in the coming quarters. Appropriate planning for future
seasons coupled with the right levels of inventory will ensure that precious capital is not
blocked in the system.

Edelweiss Securities Limited

7
 Retail

Q3FY09 quarter snapshot: Branded apparel

• Net revenue growth of 1% Y-o-Y, to INR1.46 bn. Like-to-like growth at 3%. For the
nine month period, revenue growth was at 17% and like-to-like at 6.6%.

• Park Avenue grew by about 10% and Parx by ~15%, ColorPlus, however, saw some
decline in the quarter.

• EBITDA margins dipped to 9% in the quarter due to challenging business environment.

• Some savings in the form of lower rentals have started coming in, however
renegotiations are underway for other stores. .

• At the PBT level, the Y-o-Y decline was 68%.

Chart 7: Brand revenue mix

Others
23%

Park Avenue
37%

ColorPlus
24%
Parx
16%

Source: Company

Table 2: Key quarter numbers (INR mn)

Q1 Q2 Q3 9M FY09 % Y-o-Y
Revenue 1,396 1,600 1,460 4,456 17.5
Ebitda 89 210 130 429 (6.9)
PBT 12 120 30 162 (45.6)
Source: Company

Edelweiss Securities Limited

8
 Retail

Key developments in the sector: Monthly roundup

Business reorganisation and partnerships

ƒ Pantaloon demerger, preference deal on the cards: The company plans to create
four separate entities for its retail verticals - lifestyle, value, financial, and support
services business. PRIL will be the holding company and is likely to mop up INR 3 bn
through stake sale.

ƒ Bharti Retail decides to close 4-5 non-performing ‘Easyday’ stores: Bharti Retail
operates a retail chain of 28 ‘Easyday’ supermarket stores in North India (Punjab,
Haryana) and has decided to close down 4-5 of its non-performing stores. It is however
looking to open a few more medium stores (30,000 sq ft) and expand small stores into
other markets in Punjab and Haryana.

ƒ Future Group and Hidesign close to signing JV:   The JV, which will be signed
between Future Ventures and Hidesign, will launch an India-oriented lifestyle brand,
Holii. The product will be priced 30-40% lower than Hidesign, and the brand will cater to
consumers in the mid-to-mass market segments.

ƒ Future Group to buy stake in Turtle: The Turtle Group currently operates 32
exclusive outlets across the country, including Ahmedabad, Bangalore, Chennai,
Bhubaneshwar and Guwahati, and also has presence in over 1,200 MBOs. The company,
which has two facilities in Kolkata and Bangalore, reported a turnover of INR 465 mn in
2007-08.

Expansion slows, but selective plans continue in FY10

ƒ Provogue to invest INR 250 mn on stores expansion: Provogue plans to invest INR
250 mn towards setting up ~35 Provogue stores and eight Promart stores by FY10,
spread across 800-4,000 sq ft. These stores will be spread out equally in metros as well
as tier II and tier III cities of India.

ƒ Reliance plans 1,000 ‘Delight’ stores in 2 years: After food and grocery stores,
Reliance Retail is giving a big push to its non-veg retail chain, Delight. Non-veg products
deliver 20% margins against only 10-15% in food and grocery retailing. Despite protests
the company has opened over 100 stores in Chennai, Bangalore and Mumbai. Further, it
plans to open 500 stores by 2009 and 1,000 by 2010.

ƒ Infiniti to open 20 Croma retail stores next fiscal: Infiniti plans to open 20 Croma
stores with an investment of INR 600-800 mn in 2009-10, taking its total number of
stores across the country to 50. Infiniti has technical and sourcing agreements with
Australian retail giant Woolworths. The Australian company provides technical support
and strategic sourcing facilities from its global network.

Rural markets attract retailers

ƒ Apparel companies pin hopes on small towns: Branded apparel companies like
Madura Garments, Provogue, Raymond, and many others are investing more in B- and
C-class markets with competitive pricing strategies. Roughly, organised retail brands and
unbranded apparel have proportional market share of almost 50:50 in metros, while this
ratio varies from 80:20 to 90:10 in smaller markets. Branded majors are now hoping to
cash in on this potential at a time when consumption has dipped. Raymond is planning to
come up with at least 100 retail stores, mostly in tier-II and tier-III cities, while
Provogue is planning to open 65 retail stores in B- and C-grade cities.

(The above highlights are based on news articles in leading dailies)

Edelweiss Securities Limited

9
 Retail

Edelweiss Securities Limited, 14th Floor, Express Towers, Nariman Point, Mumbai – 400 021,
Board: (91-22) 2286 4400, Email: research@edelcap.com

Naresh Kothari Co-Head Institutional Equities naresh.kothari@edelcap.com +91 22 2286 4246

Vikas Khemani Co-Head Institutional Equities vikas.khemani@edelcap.com +91 22 2286 4206

Nischal Maheshwari Head Research nischal.maheshwari@edelcap.com +91 22 6623 3411

Coverage group(s) of stocks by primary analyst(s): Retail

Pantloon Retail & Shoppers Stop

Recent Research

Date Company Title Price (INR) Recos

11-Feb-09 Retail Liquidity management

Key to success; Monthly Update

05-Feb-09 Retail Testing times ahead

Sector Update

29-Jan-09 Shoppers Margins improve, but 97 Sell

Stop revenue growth muted;
Result Update

21-Jan-09 Pantaloon Macro headwinds 162 Accum.

Retail dim outlook;
Result Update

Distribution of Ratings / Market Cap Rating Interpretation

Edelweiss Research Coverage Universe Rating Expected to

Buy Accumulate Reduce Sell Total Buy appreciate more than 20% over a 12-month period

Rating Distribution* 74 63 30 10 182

Accumulate appreciate up to 20% over a 12-month period
* 4 stocks under review / 1 rating withheld
Reduce depreciate up to 10% over a 12-month period
> 50bn Between 10bn and 50 bn < 10bn

Market Cap (INR) 68 46 68 Sell depreciate more than 10% over a 12-month period

This document has been prepared by Edelweiss Securities Limited (Edelweiss). Edelweiss, its holding company and associate companies are a full service, integrated
investment banking, portfolio management and brokerage group. Our research analysts and sales persons provide important input into our investment banking
activities. This document does not constitute an offer or solicitation for the purchase or sale of any financial instrument or as an official confirmation of any
transaction. The information contained herein is from publicly available data or other sources believed to be reliable, but we do not represent that it is accurate or
complete and it should not be relied on as such. Edelweiss or any of its affiliates/ group companies shall not be in any way responsible for any loss or damage that
may arise to any person from any inadvertent error in the information contained in this report. This document is provided for assistance only and is not intended to
be and must not alone be taken as the basis for an investment decision. The user assumes the entire risk of any use made of this information. Each recipient of this
document should make such investigation as it deems necessary to arrive at an independent evaluation of an investment in the securities of companies referred to in
this document (including the merits and risks involved), and should consult his own advisors to determine the merits and risks of such investment. The investment
discussed or views expressed may not be suitable for all investors. We and our affiliates, group companies, officers, directors, and employees may: (a) from time to
time, have long or short positions in, and buy or sell the securities thereof, of company (ies) mentioned herein or (b) be engaged in any other transaction involving
such securities and earn brokerage or other compensation or act as advisor or lender/borrower to such company (ies) or have other potential conflict of interest with
respect to any recommendation and related information and opinions. This information is strictly confidential and is being furnished to you solely for your
information. This information should not be reproduced or redistributed or passed on directly or indirectly in any form to any other person or published, copied, in
whole or in part, for any purpose. This report is not directed or intended for distribution to, or use by, any person or entity who is a citizen or resident of or located in
any locality, state, country or other jurisdiction, where such distribution, publication, availability or use would be contrary to law, regulation or which would subject
Edelweiss and affiliates/ group companies to any registration or licensing requirements within such jurisdiction. The distribution of this document in certain
jurisdictions may be restricted by law, and persons in whose possession this document comes, should inform themselves about and observe, any such restrictions.
The information given in this document is as of the date of this report and there can be no assurance that future results or events will be consistent with this
information. This information is subject to change without any prior notice. Edelweiss reserves the right to make modifications and alterations to this statement as
may be required from time to time. However, Edelweiss is under no obligation to update or keep the information current. Nevertheless, Edelweiss is committed to
providing independent and transparent recommendation to its client and would be happy to provide any information in response to specific client queries. Neither
Edelweiss nor any of its affiliates, group companies, directors, employees, agents or representatives shall be liable for any damages whether direct, indirect, special
or consequential including lost revenue or lost profits that may arise from or in connection with the use of the information. Past performance is not necessarily a
guide to future performance. The disclosures of interest statements incorporated in this document are provided solely to enhance the transparency and should not be
treated as endorsement of the views expressed in the report. Edelweiss Securities Limited generally prohibits its analysts, persons reporting to analysts and their
family members from maintaining a financial interest in the securities or derivatives of any companies that the analysts cover. The analyst for this report certifies
that all of the views expressed in this report accurately reflect his or her personal views about the subject company or companies and its or their securities, and no
part of his or her compensation was, is or will be, directly or indirectly related to specific recommendations or views expressed in this report.

Copyright 2007 Edelweiss Research (Edelweiss Securities Ltd). All rights reserved

Edelweiss Securities Limited

10