VISHAL RETAIL

Vishal Retail Ltd started in the year 1986 as discount retailer in Kolkata and is focused on tier II and III cities in the country. About 80% of the company’s stores are located in these cities. The company raised Rs 110 crore through its public issue in June’07.

BUSINESS:

Vishal Retail (VRL) is a value retailer with focus on apparels. Besides apparels it has a presence in a wide range of household merchandise and other consumer goods like footwear, toys, home furnishings to mobile phones, watches, toiletries, and grocery items.VRL’s outlets sell over 70,000 products, which meet all household requirements. The company has focused on the lower middleincome group as its customers and the strategy has served its well so far. To increase its penetration the company has also experimented with small formats and it also plans to re-size around 25 of its stores. They have also opened restaurants within their stores to gain a higher share of customer’s wallet. As of now the company has 181 retail stores across 107 cities covering a total area of 2.98 million sq feet. VRL has an edge over peers with its focused business model operating largely through hypermart format. Thus it helps to being in economies of scale for sourcing raw materials and pass on the benefits to consumers. The company’s focus continues to remain on Tier II and Tier III.

It also has an apparel-manufacturing unit in Gurgaon and Dehradun. The company has 29 warehouses located in 8 key cities in India covering over 1.05 lakh sq ft area. The company manufactures about 9% of its requirement for apparels in its existing facility. Currently the company is consolidating its existing store count and has kept its expansion plans on hold.

FINANCIALS:

The sales have grown at a CAGR of 62% from Rs 147 crore in FY05 to Rs 1013 crore in FY08. Net profit also has grown at a CAGR of 91.7% from Rs 3.1 crore to Rs 40.6 crore during the period. Though the company did witness a slowdown in sales in the Sept’08 quarter, the revenue mix saw a shift towards non-apparels. The company has made a conscious effort of shifting towards non-apparels and staples.

Apparel share declined to 57% in second quarter compared to 62% in first quarter. In comparison, revenues from FMCG and other non- apparel goods rose to 24.1% (19.7%) and 18.2% (16.7%) respectively. This has a positive impact on the margins. The company is gradually increasing share of its private label in every category. This will further boost margins. However, the company has not been insulated from the slowdown in the overall consumption spend. Moreover delay in delivery of stores has resulted in very high inventory. This has resulted in the need for working capital funding, which has resulted in higher interest outflows. This has become a major concern for them.

GROWTH DRIVERS:

The company expects to continue its 40-50% sales growth in the coming future. The company earns around 5-7% of its operating profit from its private label products. Going forward, the company is looking at further increasing share of this high margin segment to drive growth and maintain EBITDA margins at around 12%. The overall share of private label is expected to increase from the current 18% in FY08 to 25% by end of March 2011.

The company has adopted the franchisee model for future store expansion. This would help to curb its operating costs as well.

OUR TAKE:

Besides the delay in store completion and increasing financing costs, the company will have to cope with declining sales growth in the coming times. The stock has been beaten down badly in this market crash and its rising debt levels are a concern, yet its business model makes it a good portfolio stock.