The Hindu Business Line : Is there room for several players?

It might be too early to answer that question but with none of the financial wherewithal of the conglomerates, there is the risk of some of the smaller players getting marginalised.

For retailers who feared the entry of foreign players with their big-box formats and deep pockets, the entry of Reliance and Aditya Birla group may not be much comfort. After all, the competition from these retailers could be just as brutal.

In a country of one billion people and a retail market set to grow at an annual rate of 30-35 per cent over the next couple of years — could there be room for several players? It might be too early to answer that question but with none of the financial wherewithal of the conglomerates, there is the risk of some of the smaller players getting marginalised.

However, current players are gearing up for the tough fight ahead and have sought funding to help them expand their operations. Regional retailers such as Subhiksha and Trinethra have had access to private equity funding in the past. Subhiksha, one of the earliest to try the discount store format, is to set up 600 stores by March 2007, from its current 150. Of these, close to 150 will be set up in the NCR region.

UK-based private equity firm Actis took a 65-per cent stake in Nilgiris, which has a strong foothold in the South. Nilgiris has converted the stores that it owned into franchise operations, as foreign investment is allowed only in franchisees. A franchise might also help it expand more rapidly; the 100-year old chain has less than 50 stores at present.

Raising resources

These retailers have had a first-mover advantage in the south and their concentrated presence might help them survive the onslaught of new entrants in some cities. However, forays into newer territories in the North are fraught with risk as regional differences widen and bigger players fight for territorial dominance. They also suffer the danger of over-crowding. This could make them consolidation targets in the long term. This might be something to watch out for if any of these retailers choose to tap the equity market over the next year or so.

The stress of the impending battle is already beginning to show as even larger players are seeking funds to fuel their ambitious plans. Barely a year or so from the time of their rights offerings, both Pantaloon and Trent are set to tap the market once again. For Pantaloon, its stakes are definitely higher as it fights to preserve its reputation as the company that revolutionised Indian retail. With its resources stretched, the company will have to improve its cash flow from operations. The only way to do that would be to increase the share of its food and grocery retailing, where customers pay cash down and suppliers give credit. However, this is a high-volume but low-margin business.

While the risks appear to have been enhanced, Pantaloon's track record in execution and its understanding of market pulse is likely to ensure that it remains in favour. The stock, along with Shoppers' Stop, has emerged as market favourites; the Tata-owned Trent has been a laggard in the space.

Valuations

Retail stocks were underperformers over the past year, however, as the valuations priced in most of the benefits. They are likely to remain range-bound in the near term as investors are on standby mode to watch how current players take on new competition. Investors who do not want to play the waiting game may consider booking profits partially on Pantaloon Retail. The stock can be accumulated on sharp declines linked to market weakness.

Shareholders can hold Shoppers' Stop. We believe that it operates in an arena that is not likely to see much competition in the near term; it is best placed to capitalise at the premium end of the segment.

While the retail forays of Reliance and other players have just begun, the stocks may command higher valuations once the retail ventures take off. Parallels can be drawn to the premium enjoyed by ICICI Bank, Aditya Birla Nuvo, Bajaj Auto and Max Healthcare from their stakes in insurance ventures. While the market is unlikely to price in the gains too quickly, this may provide an incentive to long-term investors to hold these stocks.

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