Vishal Retail, VRL is open for subscription with an initial public offering, IPO of equity shares aggregating Rs 110 crore.  

Recommendation - Subscribe for listing gains

• Vishal Retail is a retailer focused on the lower-to-middle income group, with presence mainly in tier III locations.
• Mr. Ram Chandra Agarwal, Chairman of Vishal Retail has about two decades of experience exclusively in readymade garments including manufacturing, retailing and marketing.
• Organised retail in India is growing at a CAGR of 26%. Penetration of organised retail likely to go up from around 6% currently, to around 12% by 2010.
• Value for money (VFM) positioning results in high footfalls to conversions ratio.
• CAGR of topline growth 103% and bottomline growth 187.6% during FY05-07.
• Improvement in sourcing efficiencies has led to the expansion in EBITDA margins from 3.3% in FY04 to 11.1% in FY07. However, the company may face some margin pressure going forward.
• Fatter-than-industry EBITDA margins due to (i) product mix biased towards apparel, (ii) 80% of revenues from products sourced from small local suppliers, at competitive rates (iii) Lower average lease rentals compared to peers.
• Aggressive rollout of stores, with continued focus on tier III locations, to drive revenue growth going forward.
• We expect topline growth of 90% and 44.8% in FY08 and FY09 respectively. In spite of some pressure on EBITDA margins, bottomline growth is seen to be healthy, at 95.4% in FY07 and 43.5% in FY08 and FY09 respectively.
• In view of the attractive pricing of 12.4x FY08E and 8.6x FY09E, which is at a steep discount to peers, we are of the view that investors may subscribe to this IPO for listing gains. However, the expanding operations may require further capital infusion, diluting future earnings. Also, given the fact that FIIs cannot participate in this IPO, we expect sizeable FII interest in the stock on listing, as FIIs are permitted to take secondary market exposure to the retail sector.

Investment Concerns

• Attracting and retaining quality manpower would be an issue for VRL. Entry of bigticket players like Reliance Retail could lead to higher attrition and therefore increased manpower costs.
• Level playing field may not exist for domestic players, if FDI in retail is allowed.
• Ability to compete against multi-format stores like Big Bazaar, Pantaloons, Central etc. may be hampered due to the focus on lower and middle income groups
• Focus on tier III locations may cap growth in average sales per sqft.
• Aggressive rollout of stores may be at the cost of margins, especially with the increase in revenue share of lower margin non-apparel and FMCG products.
• Inventory management would be critical in protecting margins (inventories up from 99 days of sales as at 31-Mar-06 to 151 days as at 31-Mar-07. Apparel inventories may have to be cleared by way of discounts.
• A brother of the promoters is into apparel retail under the brand “Vishal Garment” in the eastern region.
• VRL is currently undergoing litigation from Arvind Brands Ltd. in respect of its “Megamart” brand, which Arvind claim as its own. Arvind Brands has claimed permanent injunction against the usage of the brand.
• VRL continues to generate negative operating cash flows.
• Pre-IPO placements made at a discount of 26 - 46% to the cap price for the IPO.