The Hindu Business Line : Vishal Retail: Invest at cut-off

An investment can be considered in the Initial Public Offer of Vishal Retail with a medium-term perspective. Vishal Retail operates 50 hypermarkets (large stores that offer a wide variety of goods ranging from apparel to household goods) predominantly in North India under the name of "Vishal Megamart". The retail chain targets lower-middle and middle- income groups in the Tier-II and Tier-III cities. The offer proceeds will help fund the addition of 32 stores in cities such as Ajmer, Bareilly, Bhopal, Faridabad and Sholapur, to name a few. About 22 of them are slated to open in FY-08.

This value retailer has a revenue base of Rs 600 crore and recorded profits of Rs 25 crore in FY-07. A significant amount of its growth has been attained in the last two years on the back of new store openings.

Valuation

At the upper end of the price band, the offer price values the company at about 16 times its likely FY-08 per share earnings. The company does not really have a comparable player in the listed space; it might not be appropriate to compare its valuations with more premium players such as Pantaloon Retail, which is seen as a front-runner of the retail industry and operates a mix of formats. The valuation might, however, be justified considering the strong growth potential for organised retail in Tier-II and Tier-III cities; the market in such cities is projected to grow at 50-60 per cent a year, compared with 35-40 per cent in large cities. The offer presents another alternative for investors to play the retail story at a time when its competitors, mostly focussed on the top 10 cities, are dealing with stiff competition and margin pressures. Over a one-year period, assuming the company opens its proposed 22 stores on time, the fundamental picture looks positive.

However, investors can consider taking profits in the event of strong gains upon listing. Several retailers with more financial resources are increasingly targeting small towns, having sensed the opportunities in these cities. Small towns might well be the main focus of the Bharti Retail, given that its partner Wal-Mart pioneered the small-town retail format. As these players are well-placed to achieve higher sourcing efficiencies, they are likely to deliver higher quality and branded products to these markets at more competitive prices. Second, we expect more quality players — Subhiksha being one in the near future — to tap the market over the next year to 18 months. Such offers might make for more compelling investment options for those with a long-term perspective.

Small town, big opportunity

In the medium term, however, Vishal stands to benefit from its focus on small towns, where real estate is cheaper as are staff costs. The low brand penetration in small towns makes it possible for retailers to sell more of their private labels. A large proportion of unbranded products and private labels and a high share of apparels in its sales mix explains its superior gross margin of 42 per cent as against Pantaloon Retail's 35 per cent. In the last fiscal, Vishal managed to add 27 stores, which suggests that it is capable of executing its projects on time. Revenue growth is, therefore, likely to be strong in the medium term and would drive profit growth.

Concerns

However, investors would have to watch out for trends in operational parameters such as sales per square feet, footfall conversion rate and same store sales growth, where its performance has been patchy in the last couple of years. The company's same store sales growth slowed down to 11 per cent in FY-07. While footfalls (number of customers who visit the store) have risen, the conversion rate has dropped. If this trend sustains, it means that revenue growth will depend more upon its store additions and therefore, its execution capabilities, rather than the strength of its own operations.

Given the nascent stage of its operations, it might also take a while for scale efficiencies to kick in.

Offer details: Vishal Retail is promoted by Mr Ram Chandra Agarwal. The offer will raise Rs 110 crore from the public. The price band is at Rs 230-270 and the lead manager is Enam Financial Consultants.

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