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Citi Downgrades Shoppers Strop

April 22, 2007

Citigroup in its research report released just a while ago has downgraded Shoppers Stop to SELL with a price target of Rs 412, potential downside of 33%. This downgrade comes after we reported of the first Retail Downgrades in India coming from Merill Lynch on March-29th.

Shoppers Stop growth story is leveraged to rapidly growing high-end urban consumption. However, at 43x FY08E P/E valuations are steep and seem to be building unfeasible expectations from HyperCity. As such, the stock has underperformed the Sensex by 9% and Citi expects valuation roadblocks to continue. Shoppers Stops positioning has also been at the premium end, with a strategy focusing on product assortment and quality, rather than discounts, driving sales. It is also expanding in the specialty format, focusing on food, cosmetics, books and apparel.

Sum of Parts Valuation:
Sum of parts valuations returns a target price of Rs421 per share, valuing the parent company at Rs376 and the HyperCity stake at Rs45 per share. Citi values the parent Shoppers Stop based on 27x FY08E P/E, for a target price of Rs376. Shoppers Stop could trade at 10% premium to its regional peers given its superior earnings growth profile. We expect two-year EPS CAGR of 36% vs. a 30% CAGR for our Asian retail universe. A 10% valuation discount for Shopper’s Stop to our Pantaloon target valuation, due to limited growth opportunities. Shoppers Stop is expected to report an EPS of RS 13.9 for FY2008.

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