Retail stocks results preview for Q3FY12: Motilal Oswal

We expect our Retail Universe to post 22% growth in sales. EBITDA is likely to grow 17.7%, with EBITDA margin declining 40bp. PAT should grow 14.3%, led by strong growth in Jubilant Foodworks and Titan Industries. Pantaloon Retail and Shoppers' Stop are likely to report a YoY decline in PAT.

Consumer sentiment deteriorates; QSRs better placed:

Festival season sales have been much below expectations and select categories like Electronics, Apparel, Watches and discretionary items have borne the brunt. Food & Grocery is better placed. Jewelry volumes have been impacted by higher prices, though value sales are still up smartly. Quick service restaurants (QSRs) have seen moderation in volumes; however, like-to-like (LTL) sales growth remains healthy.

Lower offtake, higher overheads to strain cash flows amidst rising capex:

Retailers are facing lower same store sales (SSS) growth and piling inventories, which are likely to strain their cash flows. This coupled with committed capex plans will put further strain on financials and increase debt in a high interest rate environment. Jubilant Foodworks is likely to add ~40 stores during the quarter. Titan is expanding Fastrack, Eyeplus and Helios at a fast pace. Shoppers' Stop is likely to add five department stores in 3Q, the highest in any quarter. Pantaloon is likely to add just 0.3-0.4msf on a gross basis.

Suspension of FDI in multi-brand retail a setback:

The Government of India (GoI) has suspended its proposal to allow 51% FDI in multi-brand retail, which is a big setback for the industry. We note that most domestic players in the Hypermart and Supermarket formats are losing money and are devoid of cash flows. However, we believe that FDI in retail without concurrence of the states and changes in APMC model (Agriculture Produce Marketing Committee) Act will prevent major supply chain gains for both farmers and consumers. We are more positive on specialty retailers versus food retailers.

Cautious view on the sector:

We believe that a prolonged phase of poor consumer offtake will result in margin pressures and cash flow problems. Pantaloon Retail is most susceptible due to high debt and poor inventory turns. Shoppers' Stop is better placed due to lower owned inventory, but fast store expansion will increase debt and impact profit growth. Titan has strong cash flows and no debt - gold price movement and discretionary demand trends are key factors to watch. Jubilant Foodworks has strong cash flows; SSS growth needs to be watched in view of double-digit price increase in the last six months.

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