Those who invested Rs100 in the scrip of Shoppers Stop Ltd at the beginning of this fiscal would have ended richer by almost two-thirds (up 65.3%) of that amount so far. However, since the proposed mandatory levy of 10% excise duty on branded apparels in Budget 2011, the stock has fallen by 6.3% to Rs325 apiece. During the same period, the benchmark Sensex index of the Bombay Stock Exchange has increased marginally.
Also see | Taxing Times (PDF)
The excise duty levy comes at a time when retailers are struggling with rising costs, including skyrocketing cotton prices. To offset the impact of higher input costs, many retail firms announced price hikes in the recent past.
“Shoppers Stop was expected to take a 10-15% hike this month for its summer inventory to offset higher raw material costs. The excise duty hike calls for an additional 6-7% increase in product prices effective 1 April,” according to Sastha Gudalore, retail analyst at Alchemy Share and Stock Brokers Pvt. Ltd. “This means that the company would have to take about 15-20% price increase to offset the impact of both higher input costs and the excise duty levy.”
Shoppers Stop can consider absorbing some of the hike, which could reflect adversely on the already thin margins. The company’s stand-alone operating profit margin for the nine months ended 31 December stood at 8.2% compared with 7.6% last year and consolidated operating margin stood at 5.7% against 7.3% in the same period, as last year’s figures do not include HyperCity Retail (India) Ltd’s financials.
But the price hikes could affect sales volumes. Consumer demand still appears strong going by the like-to-like sales growth for Shoppers Stop department stores, which stood at 18% for the nine months ended December.
But whether that demand would be sustained after the price hikes is something investors should watch out for. It’s not for nothing that retailer shuttered shops for a day earlier this month to protest the excise levy.
Graphic by Yogesh Kumar/Mint
We welcome your comments at email@example.com