(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 !