Saikat Chatterjee, Bloomberg
New Delhi: India’s biggest retailers are adding stores to lure people whose incomes are rising in the world’s second-fastest growing major economy. They’re also luring investors.
Retailers’ shares, which lagged behind the broader market in 2006, are rallying. Tata Group-owned Trent Ltd, which runs fashion and cosmetics stores, has climbed 15% from an eight-month low in March. Shoppers’ Stop Ltd, which sells clothing, accessories and home decor items, in April had its biggest monthly gain since September.
Companies are opening outlets in smaller cities to snatch market share from the 12 million neighborhood stores at which, according to New Delhi-based consulting firm Technopak Advisors Pvt. estimates, about 96% of purchases are made. At the same time, incomes are rising and the economy is entering its fourth year of growth exceeding 8%.
“Retail companies seem to be a good sector to be in in the next year,” said Soumendra Nath Lahiri, who helps manage $3.9 billion (Rs15,838 crore) at DSP Merrill Lynch Investment Management in Mumbai. “The organized retail segment can grow at between 30% and 35% in the next three to four years.”
Pantaloon Retail India Ltd, the nation’s biggest retailer by market value, plans to spend $1 billion to open about 4,000 new stores by 2010. Reliance Industries Ltd, India’s largest company by market value, has opened 135 convenience stores and supermarkets in the year ended 31 March.
DSP Merrill bought more than 200,000 shares of Pantaloon for two of its funds, according to a company filing in March.
Six out of India’s 10 biggest retailers by market value failed to keep pace with the benchmark Sensitive Index in 2006. The 10 stocks on average gained 35%, while the Sensex jumped 47%, its fifth consecutive increase. Retail stocks are still more expensive than peers elsewhere in the region.
Higher expenses, resulting from new store openings, cut into profit margins, said Amnish Aggarwal, an analyst at Mumbai- based Motilal Oswal Securities. The pressure on margins will ease as companies grow in size and the revenue from new stores as a percentage of total sales decreases, he said.
Pantaloon, which owns the Big Bazaar hypermarket, food and grocery, clothing and bookstore chains, and home improvement stores, posted its slowest profit gain in at least five years in the year ended 30 June 2006. In the past month, HSBC Holdings Plc and Citigroup Inc. have raised their ratings on the stock on expectations its performance will improve.
“Last year, Indian retailers didn’t report good numbers,” Lahiri said. “But with the rapid scaling up, I would expect them to post better earnings this year.”
Share performance already is improving. While the Sensex is up 60% from its low point for the past year, seven of the 10 biggest retailers have risen more than that from their lows. Pantaloon has almost doubled, Rajesh Exports Ltd, a retailer of gold jewelry, has gained 275%, Titan Industries Ltd, the country’s biggest watch and jewelry retailer, has doubled, and Shoppers’ Stop is up 49%.
The rally means retailers’ stocks aren’t cheap. Pantaloon shares are valued at 103 times earnings for the past year, while Shoppers’ Stop sells for 86 times. Shares in the Bloomberg Asia- Pacific Retail Index are valued, on average, at 34 times. Companies in the Sensex sell for 24.8 times.
Also, retailers’ costs are rising because their rents in cities including New Delhi, Mumbai and Bangalore have almost doubled on average in the past year. The budget for the year to 31 March has imposed a 12.4% tax on commercial rentals that may pare profits. Retail companies spend about 6% to 9% of their sales on rent, according to Morgan Stanley.
“There will be pressure on margins because of the rise in rents, employee costs and logistics expenses,” said Dipak Acharya, who manages about $19 million at BOB Asset Management in Mumbai. BOB trimmed stakes in Pantaloon, according to a company filing in March.
Reliance and Tata Group, both based in Mumbai, are going after retail dollars in a nation with a burgeoning middle class. Store-chain sales will surge 15-fold to $60 billion by 2015, Morgan Stanley predicted in a report last year. India’s per-capita income will quadruple by 2020, Tushar Poddar, an economist at Goldman Sachs Group Inc., said at a conference in New Delhi last month.
Reliance, India’s most valuable company, plans to spend $5.5 billion to build convenience stores and supermarkets across the nation. It opened its first retail store in November. Shares of Reliance, which also refines oil, produces natural gas and makes chemicals, have risen 28% this year.
Closely held Tata Group, which owns Trent and runs the Westside chain of lifestyle stores and Star India Bazaar, a hypermarket, opened its first electronic goods shop in October with sourcing and technical support from Australia’s Woolworths Ltd.
Competition from global retailers such as Wal-Mart Stores Inc. and Carrefour SA is absent. The government limits overseas investment in the nation’s retail industry to single-brand merchants, preventing global chains from buying stakes in local companies or setting up their own stores.
India’s communist parties, key allies of the ruling Congress Party-led coalition, oppose foreign investment in the retail sector for fear it will put small shop owners out of business. The government has commissioned a study on the impact of large retailers on neighborhood shops.
Wal-Mart, the world’s biggest retailer, is still trying to profit from retail growth in India. The Bentonville, Arkansas, company in November agreed to form a wholesaling and supply- chain venture with New Delhi-based Bharti Group, which runs India’s biggest mobile phone service provider.
Sales at all chains in India will reach 35% of total sales by 2015, up from about 4% now, Raj Jain, president of emerging markets at Wal-Mart, said in an interview in December.
“The organized retail market is at a stage at which China was about a decade back,” said Chakri Lokapriya, who manages $275 million of Indian stocks at BNP Paribas Asset Management U.K. Ltd in London. Lokapriya doesn’t own shares of Indian retailers because of foreign investment restrictions and is waiting for earnings growth to accelerate.
There are 75 listed retailers in China with more than $20 million in market value, according to data compiled by Bloomberg. By contrast, India has 13.
India’s economy, Asia’s fourth biggest, has grown at an average rate of 8.6% since 2003, the fastest pace since independence in 1947. Indians made an estimated $300 billion of annual purchases in 2006, according to Technopak.
“You have to look at these stocks on a three- to four-year time horizon,” said David Pezarkar, a money manager in Mumbai for SBI Funds Management Ltd, which oversees $3.6 billion, including Pantaloon shares. “If the companies achieve the growth they have projected, it will provide very handsome returns to investors.”