(NSE 532638 | SHOPERSTOP)
Shopper’s Stop Analysis and Future Expected Returns (Investors Stop???)
Here is kind of analysis which I guarantee that you would have never read or heard anywhere else on Shoppers Stop (Organized Retail), its future growth potential limits and the expected return from point of view of equity investor in Shoppers Stop or Pantaloons or Trent (Westside).
Please read the below analysis and always keep in mind the following 4 simple facts:
• Indians on an average spend close to 60% of their expenditure on FOOD.
• Organized Retail have just 1% or even less share of FOOD sales in India.
• Indians spend around 10%-11% only on clothes, beauty products and footwear.
• Almost 80%-90% of sales of Shoppers Stop or Pantaloons or Trent (Westside) are clothes , beauty , accessories and footwear products and less than 10%-15% comes from food sales and that too comes from great brands of food (Nestle-Maggi , Cold Drinks , Biscuits ,Milk products ,etc which are razor thin margin business)or commodities which are again almost zero margin products.
With the above thoughts firmly in mind here goes my analysis.
With Organized Retail currently being around 6-7% of total retail sales I am predicting that in next decade or two it will not reach even close to 18-20% of total retail sales and I’ll back it up with logic.
This prediction is completely opposite (downright negative if you want to say) compared to every single projection available in India and abroad by any institution on future of Organized Retail. The prevailing wisdom is Organized Retail will soon by 2015 or so (add 1-2 years more if you like) capture almost 15%-18% of total retail sales in India and in the process the companies like Shoppers Stop or Pantaloons or Trent (Westside) are great buys even at P/E of 35+. Again I have not seen sell ratings on any of these companies except one by Nirmal Bang. Rest all are positive on this sector as a whole factoring in years of future growth at a return on capital which is at least twice of what these companies have shown in last decade of phenomenal growth when in fact for 4-6 years credit was as cheap as air.
The consultants , analysts , investment bankers and investors may have got it all wrong in trying to figure out how much expansion can the Organized Retail logically have in India given India’s unique expenditure pattern , infrastructure , real estate and electricity situation which is completely different from anywhere in the world .
This happens because a typical person who is consultant/analyst working in a company which brings out studies on growth potential of Indian retail may have say a package of minimum 12/15 lakhs per annum and his spending is less than 10% on food but he buys jeans at Rs. 4000, shirts at 2000 ,shoes at Rs. 5000 , perfumes at 3000 , LED TV at 50000 and some furniture at 25000 from the mall and he just cannot connect with how real India spends money on even though the data is right infront of his eyes.
These guys’ brains just short circuit and use System 1 (part of type of thinking of brain which uses shortcuts to make things easy) as opposed to System 2 (which is purely rational and calculative) as explained brilliantly by Daniel Kahneman in his amazing book http://www.amazon.com/Thinking-Fast-Slow-Daniel-Kahneman/dp/0374275637
Infact there would actually be a complete limit on how much Organized Retail can ever grow and capture the total retail expenditure in India (My guess is around from 6-7% today to 18-22% in coming 2 decades and that’s being too positive)
Read more for completely different way to look at Shoppers Stop !
Here is a tricky and tough(if you can call it with these terms) question for you regarding investing in a particular stock –Will you invest your money to buy stocks of a company whose performance summary is following :
- Talking about consistency it has made consistent losses(Negative Net Profit) for last 7 years with losses increasing from Rs.16 crores to 1600 Crores.
- The cumulative total Net Profit it has made is grand sum of Rs.2 crores on a cumulative 3 year sales of Rs.105 Crores in years 2002-2004.
- Total cumulative losses for last 7 years are equal to almost Rs. 5248 crores ONLY.
- It has NEVER been a free cash flow company in its entire history of existence and its almost impossible that it will have a free cash flow in the coming near future.
- It has a negative net worth for last 3 years and almost sure to have negative net worth in coming 2 years at least.
- It has NOT paid a dividend till date (don’t start to argue that it is behaving like Microsoft, Google or Berkshire) not because it was investing the profit for greater return in business but purely because it just CANNOT pay dividends.
- It is unable to pay back and manage even its working capital to an extent that it has changed working capital limits to working capital term loan(in plain English not enough money to pay you now ,come back after some years).
- Forget working capital it is even unable to pay interest on the loans taken and hence it converted interest on loans from banks funded interest term loan repayable in 9 years including 2 years moratorium (plain English I am bankrupt to an extent I cannot even pay interest even in next two years, and banks happily said YESSS. Try saying to ICICI or SBI that you cannot pay EMI on your home loan because of some emergency in your family for say 6 months or so and see the fun!!!!They will first grab your collar, then your neck, then your house and then they will start talking!!!)
- After being unable to pay money due on time and amazingly ‘requesting’ and getting banks to postpone paying up, the company has in fact been able to secure even more debt from the same bankers.(Try doing that with your car loan or house loan where after you default on payment of even miniscule amount or just a small delay– you are going to be kicked out of office of any bank where you go for loan almost forever or charged a rate which would be absurd).
- Forget paying someone whom you owe money to, the company has gone a step further in NOT paying the TDS (worth 422 crores) and service tax for such a long term(greater than 6 months) that auditor had to mention it in Annual report . (You poor salary earning individual , you do not have a choice , you get the money only after the govt had its cut through the company. Alas the govt can also be fooled by companies like that who take your money and keep using it for as long as possible. )
- A company which actually tried to raise more money than its whole market cap via GDR. Can you believe the ambitions and positive outlook of the company??(Of course you guessed it right what would have happened to GDR )
- The company is so asset starved that security includes intangibles like the Brand name of company(Word secured has a different meaning for these bankers who have lent money).
- Its a company (not a bank) where its Chairman says “realistic estimation of total assets both quoted and unquoted (carried in the Balance Sheet at cost) would exceed Rs 12,000 crores but the market value of the company is around 1/10th of the estimate by the Chairman.(So either market is stupider by 10 times and Chairman is wiser by 10 times or vice-versa ).
- It is perhaps the only company which in its annual reports shows performance comparison to NSE and BSE by showing the ‘Volume’ of shares traded. Yes that’s volumes of share traded and NOT the price because if it shows the price then it would look ‘interesting’ to the say the least. Read further to know about this “Great” company
Organized Retail will NOT be as successful and profitable in India as is projected by Everybody
Now that is a very bold(someone will say stupid) prediction to make when everyone sees 100s of malls seemingly springing up every corner of town and full of thousands of shopping hungry people .
I have not come across any article on net which even remotely says that Organized Retail in India will NOT really be that successful as it is generally predicted to be. In fact after FDI in multibrand retail has been increased to 51% not one article came in any prominent newspaper which said that the Walmarts , Tescos of the world may not succeed in India . Everyone just automatically does following conclusion from some facts –
- India Growing country ( 7-8% + GDP growth)
- Has young population and a huge middle class who are earning a lot
- Organizedretail is just about 5%
- Directly implying that when Organized Retail becomes at least 15% there will be so many players who will make tons of money .
But I doubt anybody really has thought that may be India’s Organized retail will at least for coming 2 decades will NOT have a penetration level as it is made out to be . Even if penetration level does go up considerably still it will NOT be profitable enough for the players/investors in the market .
Business Consultants if they read this post are not going to like my thoughts at all. But I am writing this mainly warning to the prospective foreign retailers who plan to be entering India in coming months and years in the hope of growing profitably based on ONE SIDED ppts/docs given by the so called retail experts/consultants from India. I hope I am proven wrong in coming decade or two.
I just came across article in Economic times where we have following comments
“Tablet is essentially a content consumption device than a content creation device… It will never be able to eat into PC sales, especially in emerging markets such as India”
Vyomesh Joshi, Executive Vice President, Hewlett Packard
“Tablet has become an aspirational device for people who possess more than one computer. But India will never see PC sales being hit by tablet sales, due to the sheer low per capita income of the country”
Ashwini Aggarwal, Former Executive Director, MAIT (MAIT, Manufacturer’s Association of IT Industry, is an apex not-for-profit body representing and driving the eco-system of the Indian IT)
Well it just made me think whenever some one senior(and supposedly intelligent and has vision) makes really big future prediction with a word like NEVER .
Well here is an excerpt from HP Quarterly conf call with analysts :
“In Q2, consumer PC revenue declined over 20% year-over-year. Even though our consumer PC expectations had been cautious, the steepness of our Q2 decline is greater than what we had anticipated. We are remaining cautious in the near term .”
Here is tablet sales by Apple only(well in fact only Apple matters when I am talking about tablets):
“Apple sold 9.25 million iPads during the quarter, a 183 percent unit increase over the year-ago quarter”.
Infact apple has sold a total of 25 Million iPads in around 15 months.
Assume all of Apple sales were in Developed markets and NONE in emerging markets like India . Even the dumbest of person can say at least somebody is buying tablet where he might have bought a laptop if tablets did not exist .
Now that somebody need not be from the Developed country only . If someone thinks that per capita income of India and China is very low and hence tablets will never eat into pc sales then he is the most ignorant person on planet earth . And believe me the price of tablets are not too high by any standard at all . They are almost equal to what a full sized laptop costs .
HP(and all computer makers) is dead scared of tablets and hence has brought its own touchpad(other computer makers and mobile phone companies also are trying to copy Apple) in market to compete with iPad.
In India I do not have any sales numbers from any companies which show how many tablets have they sold but walk in to any Croma or ezone store and you would see wide variety of tablets on display from samsung to acer to blackberry and of course Apple . And they are selling though I cannot quantify it .
With all these data I cannot believe that really senior people can think that a product costing almost same as a highest end mobile phone (iPad 1 starts from Rs. 23000 only while a lot of mobile phones cost more than Rs. 23k) will not eat into PC market share .
People just think Indians are so poor that they cannot even afford buying tablets . I absolutely agree with the pathetic state of India’s per capita figure but India and China are so huge that even 0.1% of people (who are really rich and mind you for India that equals almost 9 million people) will be enough for companies with really good tablet offering to succeed and have a good return on investment .
Those companies who will ignore India because they think Indians are poor do so on your own peril . (please learn from Apple who though was late by almost 8-10 months in bringing in iPad 1 to India introduced iPad 2 as soon as it could and boy its selling like hot cakes in India as well .)
My prediction- Tablets in emerging countries are going to eat into laptop sales . How much I dont know but its easy to find out . Any person buying a tablet means a laptop is not sold . Do the math !!!!!
Here is the proof of it :
iPad is now 11% of PC market
According to IDC’s estimates, worldwide personal computer sales excluding tablets were 84.4 million during the quarter .
Looking at it another way, assume that most iPads were sold to consumers, and that overall PC sales are split about halfway between consumers and businesses. In that case, the iPad has already sucked up about 20% of the consumer PC market.
Lets say if iPad was lined up with all the other computer makers it would be the 4th Biggest computer brand in the world –after HP, Dell and Lenovo …oh yes ahead of Acer .
If the macs(3.95 million) were added to iPad’s sales last quarter total will be 13.2 million with apple being 2nd largest computer vendor in the world after only HP (with 15.3 million).
And after this look at the confidence(ignorance) of HP VP saying Tablets will not eat up the market share of PC(laptop) . Its truly Alice in Wonderland Situation .
I have always wondered whether some people who are supposed to be more knowledgeable than simple mortals like me or may be you get things right when it comes to predicting the future.
As Yogi Berra said “It’s tough to make predictions, especially about the future. ”
So I tried looking for what Indian govt or Planning Commission had in mind in early 2000 when it was predicting the future telecom penetration aim .
Have a look at this http://planningcommission.nic.in/aboutus/committee/wrkgrp/wg_telecom.pdf
I assume that government or Planning Commission is supposed to make really rosy predictions because thats what politicians have been doing from time immemorial(or whenever they started talking ) .
So in 2001 Planning Commission said that its policies are going to be such that India by 2010 will have a teledensity of around 15% (read page number 8 of above link).
To quote “Make available telephone on demand by the year 2002 and sustain it thereafter so
as to achieve a tele-density of 7 by the year 2005 and 15 by the year 2010”.
As of today 25th July 2011 the teledensity is surely above 60% (please i know lots of people having multiple sims and not using them hence I have taken a conservative rounded off value ).
Now to take into perspective the absolute D grade prediction by Planning Commission you have to see that it was wrong by over 4 times that too being too conservative. Amazing .
I wonder where else Planning Commission is going to make such conservative predictions and people of India are going to surprise them by achieveing 4 times better performance in a span of just 8-10 years .
I am waiting for 2020 !!!!!!!