Shoppers Stop posted Q3 FY08 EBITDA at 4.3%, showing that margin pressure continues to be the most important concern for the stock. Higher operating costs (employees, rents) have taken a toll on margins, and we are now estimating 5.7% EBITDA margin in FY09E from previous 8.6% expectations.
Management has indicated that Shoppers will raise Rs300 crore- Rs500 crore through a rights issue. Part of this will fund store expansion, and part may be used to increase its stake in Hypercity to 51%. While it is difficult to determine the price of the rights issue, but assuming that it comes at the current market price, potential equity dilution could be in excess of 20%.
Citi SOTP Valuation:
Valuing Shoppers at Rs294 based on 27x FY09E P/E, and Valuing its potential 51% stake in Hypercity at Rs66 per share based on 1.2x FY09E sales. Price Target of Rs 360.
HSBC SOTP Valuation:
INR 439 for Shoppers Stop, and INR55 for Hypercity. Target Price Rs 494.
We recommend investors not to take any fresh positions at least until the market sets a clear direction. Citi’s views are probably right as they had recommended a SELL on the stock in April-07.