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Buy Shoppers Stop Ltd For Target Rs.310

About the stock: Shoppers Stop (SSL) is one of India’s leading departmental stores and has undergone various structural changes with focus on enhancing its share of private label brands and beauty portfolio, accelerating growth through digital channels and providing better shopping experience through ‘personal shoppers’

* Operates 84 departmental stores and 127 beauty format stores spread across 4.4 million sq ft and is present in 47 cities.

Q1FY22 Results: Covid induced lockdowns significantly disrupted the quarter but headline numbers beat consensus estimates.

* Revenue de-grew 70% QoQ to | 201.1 crore (Q1FY21: | 53.9 crore)

* The company achieved operational cost savings worth | 140 crore (vs. Q1FY20 levels), which reduced the quarterly cash burns, to certain extent

* EBITDA losses were at | 113.2 crore vs. | 62.8 crore in Q4FY21. During Q1FY22, the company reported negative FCF worth | 110 crore

* SSL’s liquidity position remains fairly stable with cash & investments worth | 96 crore and debt worth | 195 (net debt | 19 crore, D/E: 0.1x).

What should investors do?

The stock price has underperformed the broader indices over the last five years on account of weak SSSG, muted store addition pace and lower share of private label brands

* With the new management team in place, we expect SSL to revive its revenue trajectory and margin profile. Reasonable valuations prompt us to be positive on the stock and maintain BUY

Target Price and Valuation: We value SSL at | 310 i.e. 8x FY23E EV/EBITDA.

Key triggers for future price performance:

* We believe the new MD (former Westside CEO) would bring in his expertise in the private label brands domain and focus on enhancing the share of private labels

* The company expects to ramp up space through addition of 20 stores (10 departmental stores) in FY22E (capex: | 100 crore for FY22E)

* SSL undertook cost optimisation initiatives in FY21 of which it expects ~45% to be sustainable in nature. This would aid margins, going forward, with lower breakeven sales for new stores

* Key thrust on accelerating investments in omni-channel with long term target of channel contributing 20% of sales from current ~6%.

Alternate Stock Idea: Apart from SSL, in our retail coverage we also like Trent

* Inherent strength of brands (Westside, Zudio, Star, Zara) and proven business model position Trent as a preferred pick

* BUY with a target price of | 1,060.

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