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RETAIL INDUSTRY IN INDIA: Realized, Reorganized, Revitalized


India is the fifth largest retail market globally, with a size of US$500b, and has been growing at 7% per annum. Organized retail accounts for just 5% of total retail sales and has been growing at 35% CAGR.
We believe the Indian retail story is best understood in three Rs - (1) Realized, (2) Reorganized, and (3) Revitalized.

R1 - Realized: Learnings from the hyper growth frenzy
During 2005-2007, the sector was in a hypergrowth phase. However, companies got carried away and committed strategic and operational errors, which they subsequently realized:

R2 - Reorganized: Getting its act together
Reality dawned during the global slowdown phase of 2007-2009. The Indian retail players paused to realize their past mistakes and took time and effort to re-organize themselves: However, this was not before causalities like Subhiksha and Vishal Retail had deflated the retail story. Industry-wide cost realignment has enabled players like Trent and Shoppers Stop to fine tune their big box hypermart models of Star Bazaar and Hypercity.

R3 - Revitalized: Ready to ride India's NTD wave
Post this re-organization, we believe the sector is now revitalized and is poised to fully benefit from India's Next Trillion Dollar opportunity:

MOSL 5S framework: Specialty retailers in driver's seat
We have studied the various tenets of a successful retailing model propounded by Sam Walton, the founder of Walmart. We have mapped and evaluated various retail companies based on five factors - scalability, sales mix, strategy & systems, sustainability, and strength of earnings. We note that specialty retailers like Titan seem best placed due to strong brands, huge cash flow, scalable operations and steady growth. Market leader, Pantaloon Retail is rated lower due to low inventory turns, huge investments in unrelated businesses and poor cash flows. Shoppers Stop seems to fare better than Pantaloon with regard to systems, sustainability and earnings strength. Based on our 5S framework, Titan emerges as the best play in specialty retailers and Shoppers Stop in large-box format.

Initiating coverage on Shoppers Stop and Jubilant Foodworks with Neutral
The Indian organized retail revitalization is already reflecting in improved financials over the past few quarters. We believe that the trend will sustain in the coming periods as well. We expect the growth rates to accelerate further, as some new formats get stabilized and start generating profits. We have Buy rating on Pantaloon Retail and Neutral on Titan Industries. We initiate coverage with Neutral on Shoppers Stop and Jubilant Foodworks.