Published on 16/04/2019 10:19:55 AM | Source: Choice Broking Pvt Ltd

Buy Spencers Retail Ltd For Target Rs.. 227.3 - Choice Broking

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Spencer’s Retail Ltd. (Spencer), part of RP Sanjiv Goenka Group, is a multiformat retailer providing a wide range of quality products across categories such as food, personal care, fashion, home essentials, electrical and electronics to its consumers. Specialty sections such as Spencer’s Gourmet, Patisserie, Wine & Liquor and the recently launched Epicuisine section are some of the key differentiators in the hypermarket stores.

The company runs 146 stores, including 37 Hyper stores in over 36 cities in India. It also has online presence in eight cities. Spencer was carved out of the group's flagship company - CESC Ltd. and was listed on 25th Jan. 2019. Considering the vast growth potential in the organized retail space in India, Spencer’s calibrated store expansion, debt free operations and focus towards profitability makes it a long term player in the sector.

At CMP of Rs. 152.7, Spencer's share are trading at the FY18 P/S multiple of 1.2x as compared to its peer’s average of 2.9x. Based on its FY19E and FY20E sales, it is available at P/S multiple of 0.6x and 0.5x, respectively. Thus applying a P/S multiple of 0.7x to its FY20E sales, we arrive at a target price of Rs. 227.3 per share (translating into a upside potential of 48.8%). 


Investment rationale:

Strong domestic growth:

India has been one of the fastest growing economy in the past and is expected to be one of the fastest growing economy in the future. India’s retail market is expected to increase by 60% to reach USD 1.1tn by 2020, on the back of factors like rising incomes, lifestyle changes by middle class and increased digital connectivity. Rising income level and influence from the western culture has caused an increase on spending on clothes and food items. The per capita expenditure on apparel as well as per capita apparel consumption is on a rise leading to increased consumption. Further, per capita income is on a rise resulting in more disposable income to spend on fashionable clothes. The boom in the ecommerce sector has helped domestic companies to grow their customer base and establish a direct connect with their consumers.

Strong presence in key geographies:

With 146 stores and cumulative retail space of 1.3mn sq. ft., Spencer has presence in over 36 cities in India. It also has online presence in eight cities. States in which Spencer has presence account for 49% of the India’s retail spend and are expected to grow by CAGR of 11.3% between FY17-21. Through its online channel, the company handles around 0.06mn products a month with average ticket value higher than the average of offline Spencer’s shopper.

Calibrated store expansion strategy:

The company opened nine stores during Q3 FY19, whereas a total of 19 stores were opened in current fiscal till Dec. 2018. Spencer plans to open another 28 stores over the next 18 months, which will be concentrated in three clusters i.e. east UP, West Bengal and Andhra Pradesh. CAPEX is expected to be low. The company has opened two standalone apparel stores and another 10 are expected to be opened. According to the management, most of the stores opened in FY19 would start turning profitable, thereby further improving the profitability.

Loyal customer base:

From mere 0.9mn loyal customers in Jun. 2017 to 5.9mn loyal customers in Dec. 2018, the company has come a long way. Not only the number of loyal customers has increased but also the contribution to sales has increased from 43% in Q1 FY18 to 81% Q3 FY19. Spencer’s loyal customers tends to visit the store once in every fortnight. Various activities are used that ensure high cross selling to loyal customers. Spencer uses apparel adopter program, personalized offers, programmatic campaigns opportunity miner program and star customer program to identify and keep hold off loyal customer.

Large product offering:

Spencer provides a wide range of products ranging from staple food items to electronics and garments. It divides it product offering in three segments viz. Foods, Non-Food (FMCG) and General Merchandise, Apparel and Electrical & Electronics; which contribute 63%, 19% and 18% of the total revenue, respectively. It also offers a wide range of quality products through its own brands which cater to apparel, FMCG products, staples, home appliance products and home care products. Through its store-in-store and dedicated space it sells fresh products such as bread, patisserie and fish& meat. It also sells liquor and tobacco products through the same. Through gourmet section, Spencer tries to provide value-added grocery shopping experience to its customers. These sections have high margins which will expand overall margins.


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