Valuation of Vishal Retail looks reasonable vis-a-vis peers

Vishal Retail, VRL is open for subscription with an initial public offering, IPO of equity shares aggregating Rs 110 crore.  

The price band for the 100% book built issue has been fixed between Rs 230 - Rs 270 per equity share of Rs 10 each. The issue closes on June 13.

 
 

Sharekhan report on Vishal Retail IPO:

 
 

Company background

As of April 30, 2007, VRL has been operating 50 retail stores, including two stores that are operated by franchisees. These 50 stores are spread over about 1,282,000 square feet and located in 18 states across India.

VRL started as a retailer of ready-made apparels in Kolkata in 2001. In 2003, it acquired the manufacturing facilities of Vishal Fashions Private and M/s Vishal Apparels. Subsequently, with the evolution of the retail industry in India and the change in consumer aspirations, the company diversified its portfolio of offerings to include other retail goods. Currently, it sells ready-made apparels, and a wide range of household merchandise and other consumer goods such as footwear, toys, watches, toiletries, grocery items, sports items, crockery, gift and novelties.

Key positives

Targeting the tier-II and tier-III cities

The company is increasing its geographical presence in tier-II and tier-III cities where the major retail giants are neither present nor have any intention of going in the near term. This eliminates competition for VRL and enables it to capture market share in locations where a majority of its target customers are located.

Focusing on middle class group

The company believes in the concept of "value retailing", targeting the middle-income and lower middle-income groups, which constitute the majority of the population in India. It sells a vast range of merchandise across apparels and accessories, fast moving consumer products, food products and consumer durables with over 74,000 stock keeping units.

Backward integration to help reduce costs

In order to reduce costs and take advantage of economies of scale VRL has embarked on backward integration of its products. It has an apparel manufacturing plant located at Gurgaon, Haryana. For ensuring efficiency in the supply chain, it has set up seven regional distribution centres located around Kolkata (West Bengal), Thane (Maharashtra), Jaipur (Rajasthan), Ghaziabad (Uttar Pradesh), Ludhiana (Punjab), Gurgaon (Haryana) and Delhi.

These distribution centres spread over - 4,71,426 square feet - give a proper back-up and facilitate replenishment in a shorter time period. It also has an in-house fleet of 41 trucks which helps it to transport and deliver its products in a cost and time efficient manner.

Key negatives

Competition

The Indian retail industry is highly competitive. Competition is characterised by many factors, including assortment, advertising, price, quality, service, location, reputation, and the availability of credit and retail space. VRL also faces competition from the other retail formats including Internet sales, door-to door sales and the sale of household products directly from home.

Negative cash flows in recent fiscals

VRL has had negative cash flows for the last three years and in FY2007 its inventory piled up significantly. As per the management, the shifting of the management information system to the SAP ERP system has resulted in delayed and improper receipt of critical sales data which has led to some inventory build-up to overcome the replenishment requirements of the stores.

Closure of stores

During FY2007 VRL opened 27 stores, shifted one store and closed down three stores. In FY2006 it had opened 11 stores and closed down one store whereas in FY2005 it had opened four stores and closed down two stores. Further, in FY2003 it had opened seven stores and closed down five stores.

Valuations

VRL offers its share in a price band of Rs 230-270, which leads to a market capitalisation of Rs 600 crore (at the higher band of Rs 270). The FY2007 earnings per share works out to Rs 11 on the post-issue equity capital. At Rs 270, the stock is trading at 25x FY2007 earnings and the valuation is reasonable when compared with its peers.

Given the fact that foreign investment is not permitted in domestic initial public offerings, the expected buying interest from foreign investors post-issue could be a trigger for the stock.

Oswal Group plans retail expansion for women's intimate wear

The Punjab based women's intimate wear retail chain of Oswal Group, Straps plans to increase the number of retail stores to 40 by March 2008, Mr Adish Oswal, Managing Director, Oswal Retail Pvt Ltd said here on June 11.   

He clarified that the expansion plan is part of the rapid expansion plans being drawn up by the company across the country with increasing number of malls in the country has also lured to tap the opportunities available.

The industry experts estimates that the organised intimate wear market in the country is around Rs 2000 crore and is further expected to grow at 70 percent per annumby 2011.

Mr Adish added that Straps is expected to garner at least five percent of the market share by 2009 and is targeting a turnover of Rs 150 crore by March 2010; whereas they are also investing close to Rs 35 crore in the project and is looking at an investment of another Rs 50 crore by March 2009.

The retail chain offers 9-12 international brands in four different categories: lingerie, nightwear, swimwear and maternity wear.

Oswal Group is a premier textile group of Northern India, mainly into spinning & dyeing of all types of yarn in different blends & manufacturing of garments.

First Bharti retail store by March

Bharti Enterprises is set to open its first retail store in the country by the March 2008 and plans to open a minimum of six stores by the end of that year.

Sunil Bharti Mittal, chairman and CEO of the Bharti group, on Saturday said the branding process would be completed soon and discussions were on with Bharti's back-end partner Wal-Mart. Speaking on the sidelines of a meeting organised by the Confederation of Indian Industries (CII), he said: "The process is going according to plan and we are looking at a cluster of stores by early 2008. You will see half-a-dozen stores coming up within the year."

Mittal said during his visit to the US earlier this month as president of a CII delegation, he met Mike Duke, chairman of Wal-Mart Stores Incorporated, in Washington separately. Mittal also held a meeting with Carlos Gutierrez, secretary, US Department of Commerce.

Foreign direct investment in multi-brand retailing is not yet allowed in India. Only 51 per cent FDI in single-brand stores and 100 per cent in the cash-and-carry wholesale business are allowed. The existing policy also allows FDI in franchises.

Bharti and Wal-Mart have started recruitment and expect to sort various issues, including legal ones, soon. "We are going ahead with legal issues like brand agreement. A franchise arrangement may take some time, but we are on track," Mittal said.

Last year, the Bharti group had announced an investment of $2.5 billion in its retail venture. According to an agreement with Wal-Mart, Bharti would manage the front-end and the US major would provide back-end and logistics support.

Mittal said US companies were keen on India opening its FDI policy in multi- brand retail chains. "In the beginning they will be happy to see it happening, may be with 26 per cent FDI," he added.

Satyam Computer, JDA Software in deal for retail, consumer packaged goods space

India's Satyam Computer Services Ltd said it has forged an alliance with US-based JDA Software Group Inc in the retail and consumer packaged goods space.

The company said the association will enable it to optimize JDA Software's products for its clients, adding that the retail and consumer packaged goods industry is booming in the Asia-Pacific region.

JDA Software offers supply and demand chain products to retailers, manufacturers, and suppliers.

500 overseas brands plan to enter via franchising

More than 500 brands, including 300 from the US, are waiting to venture into the Indian market through franchising, while more than 800 foreign brands are actively into it.

According to Sachin Marya, chief executive officer of Franchise India Holdings Ltd (FIHL), around 350 brands from the US and 200 from Australia are keen to have their presence through franchisees. Several other brands from Europe and south-east Asian countries like Malayasia and Singapore are also interested.

Estimated at Rs 10,000 crore, the franchise industry has about 1,500 home grown franchisers. According to FIHL estimates, the franchising market is growing at 30%-35% now.

Marya said, "India is now the world's second largest franchise market and sectors such as retail, food, information technology and education set to witness a boom in franchising."

According to him, half of the retail boom would be through franchising. "It would open up new opportunities for the kirana shops. They have the localities and the client base. All they need is to upgrade them."

Marya was here to attend the 'Franchise & Retail Opportunities 2007', one of Asia's biggest franchise show, in Kolkata. According to FIHL, India ranks first, ahead of Russia, in terms of emerging market potential in retail and is deemed as a 'priority-one' market for international retail.

The companies prefer franchising as it spreads business and risks while giving high-value income. Moreover, freedom from staffing and operational involvement gives them more chance to invest in research and development.

"In India franchising has great potential as the franchisers have minimum risks," said Marya.

As the retail business in India is trying to move from 3% under organised sector to 5%, it opens up huge opportunities for franchising. "Franchising being a relatively nascent concept in India, there has been a lack of information and knowledge. It would grow at 40% in next few years," he said.

India may get its first Apple Store

Mukesh Ambani-led Reliance Retail is actively negotiating with the $19.3-billion Apple Inc of the US to bring its high-end Apple Store to India. If the deal falls into place, India will be only the second Asian country after Japan and the sixth country outside the US to have an Apple retail outlet. Given that an Apple Store is a single-brand retail outlet, Apple Inc can hold up to 51% equity in the venture.

Apple Inc, which started its flagship outlet in California in 2001, has over 160 stores in the US. It also has Apple Stores in Britain, Canada, Italy and Japan. The stores carry Apple computers, software, iPod music players, third-party accessories, and other consumer electronics such as the Apple TV and the eagerly awaited iPhone, to be released this month end.

Apple Stores are renowned for being the destination hangouts for its brand loyalists and are famous for their architectural features and in-store designs. They feature a theatre for presentations and workshops, a studio for training with Apple products, while offering a Genius Bar for technical support and repairs, as well as free workshops available to the public.

Reliance Retail's consumer durables and information technology (CD&IT) vertical recently launched Reliance Digital at Ghaziabad in the national capital region. Reliance Retail at present has 170 Reliance Fresh stores, which sell groceries and FMCG products.

Its next phase of expansion will see hypermarkets and more CD&IT stores coming up. According to sources the company is very keen on signing Apple and has held various rounds of talks in this regard.

When contacted, a Reliance group spokesperson declined to comment.

RIL likely to invest $20 bn over 5 yrs

India's largest private sector company Reliance Industries Ltd (RIL) is likely to invest $20 billion over the next five years. According to a recent report by Macquarie Research, a major part of this investment will be in the proposed 2 mtpa greenfield cracker at Jamnagar along with its retail venture and KG Basin field development. RIL will invest around $3.9 billion and $4.1 billion in the greenfield project and in organised retail, respectively.

The report also reveals that RIL will spend Rs 22,470 crore in petrochemical expansions and expansion in petrochemical facilities, Rs 13, 400 crore in auto-fuel retailing by establishing 800 new retail outlets by FY 2010 and Rs 1,71,141 crore in RPL's (Reliance Petroleum Ltd) export-oriented refinery.

According to company sources, "RIL's strategy is to enhance vertical integration in the energy sector and capture value in the sector. The company is likely to invest more and more to strengthen its exploration, development and production activities." Reliance is the major exporter of petroleum products in the country and exports are expected to have accounted for 57% of RIL's total production is in the first three quarters of FY07. However, the retail petroleum marketing business is relatively smaller compared to the company's refining capacity. The company has earmarked Rs 7,000 crore for the expansion of its retail network, but the plan slowed down due to negative domestic marketing margins.

On the other hand, in the exploration and production segment, the company has drilled 23% of the KG D6 blocks so far, resulting in 27 discoveries with an estimated in place reserves of 35.4 tcf.