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Vishal Retail – Outperformer

April 3, 2008

Looks like every Retail Research Analyst has started chasing Vishal Retail. We will cover notes from two HSBC and ICICI Analyst who have reiterated OUTPERFORM rating on the stock.

The expansion plan of Vishal Retail is very aggressive. It increased its retail space from 88,700 sq.ft. in FY03 to 1.3 mn sq.ft. in FY07, CAGR of 94%. We expect the retail space to increase to 5.1 mn sq. ft. by FY10, at a CAGR of 59% over FY07-FY10E. The company targets Tier-2 and Tier-3 cities where there is little or no presence of organised retail players. The company is planning a preferential allotment of shares to fund rapid expansion. Vishal is rolling out diversified formats such as “Vishal Fashion” for apparels and has plans for others like convenience stores, restaurant chains, etc.

Vishal Retail has signed an agreement with HPCL for opening stores at HPCL’s select outlets in the country. Until now only McDonald burgers and Pizza Huts Pizzas were sold at Petrol Pumps, now visitors will get to shop in Vishal’s Mini Stores. Internationally these stores record revenues of 2/3 of the total sales of the gas Station.

The company’s operating margin is higher than to peers due to owned manufacturing capacity of apparel, higher proportion of apparel in the sales mix (60%), sales of private labels only in apparels, high share of private labels in the sales mix, efficient supply chain and distribution system and low rentals.

Vishal currently trades at 22x FY09e and affords an EPS CAGR of 84% FY08e-FY10e. HSBC values Vishal Retail on a blended PE and DCF basis and arrive at a target price of INR 1,133, which translates into 32x FY09e EPS.

If you are interested, check out an excellent comparison of Reliance Fresh Vs Food Bazaar Vs Subhiksha supermarkets in the Mumbai region.

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