Retail Market India October 2014

Retail Market India October 2014

Executive Summary Market Drivers & Challenges Trends Government Competitive Landscape Indian services sector contributes to p1 % of the country s GDP Retail, a segment of services sector, is growing at a CAGR of p2 % and is expected to touch INR m1 by 2018 It has seen the entry of several high profile international players and phenomenal rise of domestic retailers Food products constitutes p3 % of the total retail market and is expected to dominate over the next n1 years Drivers Rise in organized retail Increase in disposable income Boom in real estate sector Growth in rural segment Increase in awareness Growing consciousness on health and beauty Changing lifestyle of consumers Increasing availability of credit Higher discounts and extended seasonal sales Online retailing Integration of various business strategies Rise of private labels FDI in Retail Goods and Services Tax (GST) Major Players Challenges Tough competition from unorganized players Inefficiencies in supply chain Depreciation of Rupee and rise in energy costs High chemical content Company 1 Company 2 Company 3 Company 4 Company 5 Company 6 2

Macro-Economic Indicators Introduction Market Overview Market Entry Strategies Organized Formats Drivers & Challenges Government Initiatives FDI in Retail Goods and Services Tax (GST) Trends Competitive Landscape Strategic Recommendations Appendix 3

Economic Indicators (1/3) GDP at Factor Cost: Quarterly INR tn 15 14 13 12 d1 c1 b1 a1 d2 c2 b2 a2 c3 b3 a3 c4 b4 a4 11 Q1 Q2 2010-11 2011-12 2012-13 Q3 2013-14 Q4 Inflation Rate: Monthly 2 1 % p q r s 0-1 -2 t Jul 2013 - Aug 2013 Aug 2013 - Sep 2013 Sep 2013 - Oct 2013 Oct 2013 - Nov 2013 Nov 2013 - Dec 2013 4

Indian economy is showing significant shift from agriculture and manufacturing to services Services Sector Overview GDP of India Sectoral Contribution (2013) Services sector is also known as the tertiary sector of an economy It consists of sub-sectors such as retail trade, telecommunication and information technology, tourism and hospitality, healthcare, mass media, banking and financial services and education Traditionally, as country s economy progresses from developing to developed, the contribution of services sector to the GDP overwhelmingly outpaces the contributions from the primary sector of agriculture and the secondary sector of manufacturing Currently, services sector contributes about p1 % to the GDP of India, compared to p2 % in the US, p3 % in the UK, p4 % in Singapore, p5 % in Japan and p6 % in France Indian services sector is dominated by banking and financial services, healthcare, information technology, and retail trade p7% p11% p9% p8% p10% Agriculture Manufacturing Services Retail Others Retail contributes to p10 % of the total services sector, or p12 % of the GDP of India 5

Retail market in India is among the fastest growing components of the Indian services sector Retail Market Overview Indian retail market is among the largest and fastest growing components of the economy, contributing ~ p1 % to the country s GDP Over the last decade, retailing has shifted towards modern formats such as supermarkets and hypermarkets Retail market in India is poised for strong growth in the coming years owing to rising income of consumers, demand for quality products and investor-friendly policies by the government Market Size and Growth INR tn 50 40 30 20 10 0 p2% e d c b a 2013 2014e 2015e 2016e 2017e Note: Figures are for the respective calendar years f 2018e Retail Market Segmentation (2013) Retail Market Structure (2013) p6% Segment 1 Segment 2 p7% Organized Retail Unorganized Retail Segment 3 p5% Segment 4 p4% p3% p8% 6

Various entry routes are available for foreign retailers... Retail Market Entry Strategies (1/2) Government has been undertaking reforms to liberalize the retail sector and attract significant foreign investments FDI regulations are undergoing gradual reforms and are expected to fall in place over the next n1 - n2 years Various entry routes are available for foreign retailers to invest and enter the Indian retail market Entry Routes Description Companies 7

Traditional retail formats such as kirana stores... Retail Market Organized Formats (1/3) Retail Formats Description Companies 8

Drivers & Challenges Summary Drivers Rise in organized retail Increase in disposable income Boom in real estate sector Growth in rural segment Increase in awareness Growing consciousness on health and beauty Challenges Tough competition from unorganized players Inefficiencies in supply chain Depreciation of Rupee and rise in energy costs High chemical content Changing lifestyle of consumers Increasing availability of credit 9

Retail market in India has been slowly opened up to FDI due to government initiatives over a period of time Evolution of retail FDI policy Government of India has gradually opened up the retail sector to FDI amidst reservations concerning fear of job losses, procurement from international market, competition and loss of entrepreneurial opportunities Discussions are still being carried out by the government to open up and allow p1 % FDI in multi brand retailing 1991: y1 : Indian economy opened FDI up to 51% p1 % allowed under the automatic route in select priority sectors y3 : FDI up to p3 % allowed in single brand retail with prior government approval y5 : Government proposed to allow FDI in multibrand retailing y2 : FDI up to p2 % allowed under the automatic route in cash & carry wholesale y4 : Government mulled over the idea of allowing p4 % FDI in single-brand retail and p5 % in multibrand retail y6 : Government allows p6 % FDI in single brand retailing 10

India is expected to implement Goods and Services Tax (GST) in the year 2015 Goods and Services Tax (GST) Goods and Services Tax (GST) is a comprehensive tax imposed on the supply of goods or services India is in the process of implementing a dual GST system, namely a t1 and a t2 GST will replace a variety of taxes such as t3, t4, t5, t6, t7, t8, t9 and t10 The combined tax rate ( t1 + t2 ) on an item is expected to be between p1 % and p2 %, although the rates for the component taxes are yet to be decided With the implementation of GST, prices of goods are expected to fall, provided the benefit of reduced taxation is passed on to consumers In case there are revenue losses to a state government due to implementation of GST, the Government of India would provide compensation to the state government for the same Overall, GST would bring about a number of benefits for all stakeholders involved Reduction in the total number of taxes paid to just two, namely t1 and t2 Net decrease in the tax rate on goods, thereby reducing unit cost of goods and lowering prices of final products Elimination of cascading tax, thereby making the taxation process more efficient Net decrease in transaction costs of taxpayers through a simple tax structure Overall increase in government revenues, as lower prices would boost consumption of goods 11

Trends Summary Higher discounts and extended seasonal sales Online retailing Key Trends Rise of private labels Integration of various business strategies 12

Porter s Five Forces Analysis x Threat of New Entrants Impact i1 Impact i4 Impact i5 Impact i2 Bargaining Power of Suppliers x x Competitive Rivalry Bargaining Power of Buyers x x Threat of Substitutes Impact i3 13

Competition Summary Players Food Products Soft Goods or Consumables Hard Goods or Durables Retail Services Arts and Entertainment Public Players Company 1 Company 2 Company 3 Company 4 Company 5 Company 6 Private Players Company 7 Company 8 Company 9 Company 10 Company 11 14

Competitive Benchmarking (1/5) Public Trading Comparables Company 1 Company 2 Company 3 Company 4 Market Capitalization (INR bn) Share Price (INR) EV/EBITDA (x) EV/Revenue (x) PE Ratio Note: Top 3 Public companies based on the Market Capitalization; Market Capitalization, Share Price and PE ratio is as of 22/07/2014 15

Competitive Benchmarking (2/5) Key Ratios of Top 3 Companies Operational Basis (FY 2014) (1/3) 10 5 0-5 % a1 b1 Company 1 c1 Gross Margin a2 Operating Margin b2 c2 Company 2 Net Margin a3 b3 Company 3 c3 Company 1 recorded gross margin of a1 %, higher than both Company 2 and Company 3 which recorded gross margin of a2 % and a3 % respectively Company 2 recorded operating margin of b2 %, higher than both Company 1 and Company 3 which recorded operating margin of b1 % and b3 % respectively Company 1 recorded net margin of c1 %, higher than that of Company 3 which recorded net margin of c3 % but lower than that of Company 2 which recorded net margin of c2 % 16

Public: Company 1 (1/4) Company Information Offices and Centres India Corporate Address Tel No. Fax No. Website Year of Incorporation Ticker Symbol Stock Exchange Products and Services H1 Head Office Brands Products/Services Key People Name Designation Chairman and MD Director CFO COO 17

Public: Company 1 (2/4) Financial Snapshot Key Ratios Total Income INR mn 10,000 0 p Financial Summary a 2010 The company incurred a net loss of INR m1 in FY 2013, as compared to net profit of INR m2 in FY 2012 The company reported total income of INR m3 in FY 2013, registering an increase of p1 % over FY 2012 The company earned an operating margin of p2 % in FY 2013, a decrease of p3 percentage points over FY 2012 The company reported debt to equity ratio of r1 in FY 2013, an increase of p4 % over FY 2012 Key Financial Performance Indicators Indicators Value (22/07/2014) Market Capitalization (INR mn) Total Enterprise Value (INR mn) EPS (INR) PE Ratio (Absolute) Total Income q b 2011 r c 2012 Profit / Loss d s 2013 Profit INR mn 500 0-500 -1,000 Particulars Profitability Ratios Operating Margin Net Margin Profit Before Tax Margin Return on Equity Return on Capital Employed Return on Working Capital Return on Assets Return on Fixed Assets Cost Ratios Operating costs (% of Sales) Administration costs (% of Sales) Interest costs (% of Sales) Liquidity Ratios Current Ratio Cash Ratio Leverage Ratios Debt to Equity Ratio Debt to Capital Ratio Interest Coverage Ratio Efficiency Ratios Fixed Asset Turnover Asset Turnover Current Asset Turnover Working Capital Turnover Capital Employed Turnover y-o-y change (2013-12) 2013 2012 2011 2010 Improved Decline 18

Public: Company 1 (3/4) Key Business Segments Retail Key Geographic Segments India 100% 50% 100% Company 1 has been operating solely in the retail segment over the last four years 100% 50% 100% India is the only geographic segment in which the company has been operating for the last four years 0% 2013 0% 2013 Business Highlights Description Overview Business Operations Business Network News Company 1 is a subsidiary of c1, a leading textiles and apparel company Through its parent company, Company 1 holds exclusive retail rights in India for notable international brands b1, b2, b3 and b4 The company also retails its home brand b5, a range of suits and fabrics It operates in high streets, malls, luxury shopping arcades, 5 star hotel properties with store sizes ranging approximately from a1 sq ft to a2 sq ft It s retail network is spread across all major metros, mini-metros, state capitals with presence across Tier II and Tier III cities, making it the only retail company in India to cater to all socio-economic segments Has a network of n1 company-operated and franchise stores across n2 cities covering over a3 sq ft Note: Business Segments and Geographic Segments are based on total revenues 19

Public: Company 1 SWOT Analysis (4/4) S O W T 20

Private: Company 2 (1/5) Company Information Offices and Centres India Corporate Address Tel No. Fax No. Website Year of Incorporation Products and Services H1 Head Office Category Retail Formats Key People Name Designation Chairman, MD Director Director Director 21

Private: Company 2 (2/5) Shareholders of the Company Ownership Structure Name No. of Shares held Segment 1 Segment 2 Segment 3 Segment 4 p1% p3% p4% p2% Note: AGM as of 8th Aug 2013 22

Private: Company 2 (3/5) Financial Snapshot Key Ratios 15000 10000 5000 INR mn 0 p Financial Summary a 2010 Total Income q b 2011 Net Profit/Loss c 2012 a 2013 INR mn 150 100 50 0-50 -100 The company incurred a net loss of INR m1 mn in FY 2013, as compared to net loss of INR m2 in FY 2012 The company reported total income of INR m3 in FY 2013, registering an increase of p1 % over FY 2012 The company earned an operating margin of p2 % in FY 2013, an increase of p3 percentage points over FY 2012 The company reported debt to equity ratio of r1 in FY 2013, a decrease of p4 % over FY 2012 r d Particulars Profitability Ratios Operating Margin Net Margin Profit Before Tax Margin Return on Equity Return on Capital Employed Return on Working Capital Return on Assets Return on Fixed Assets Cost Ratios Operating costs (% of Sales) Administration costs (% of Sales) Interest costs (% of Sales) Liquidity Ratios Current Ratio Cash Ratio Leverage Ratios Debt to Equity Ratio Debt to Capital Ratio Interest Coverage Ratio Efficiency Ratios Fixed Asset Turnover Asset Turnover Current Asset Turnover Working Capital Turnover Capital Employed Turnover y-o-y change (2012-11) 2012 2011 2010 2009 Improved Decline 23

Private: Company 2 (4/5) Business Highlights Description News Company 2 is Asia s second largest company in terms of coffee estate ownership Besides its own coffee estates, it also sources coffee from n1 private coffee growers Overview It was the first company to bring the concept of café to India The most visible arm of the company is the hugely popular coffee chain b1 The first outlet opened in y1 in p1 Today, it has spawned other formats such as b2, b3 and b4 b1 operates more than n2 cafes across n3 cities and towns in India and serves more than n4 customers everyday It also runs international outlets in p2 and p3 Retail Network b2 operates n5 outlets across major metros in India b3, a premium coffee chain, operates n6 outlets in India, namely n7 in p4 and n8 each in p5 and p6 b4, a small format coffee kiosk, operates over n9 outlets all across India 24

Private: Company 2 SWOT Analysis (5/5) S O W T 25

Thank you for the attention Retail Market India report is part of Netscribes Retail and Services Series. For any queries or customized research requirements, contact us at: Phone: +91 22 4098 7600 E-Mail: info@netscribes.com About Netscribes Netscribes is a knowledge-consulting and solutions firm with clientele across the globe. The company s expertise spans areas of investment & business research, business & corporate intelligence, content-management services, and knowledge-software services. At its core lies a true value proposition that draws upon a vast knowledge base. Netscribes is a one-stop shop designed to fulfil clients profitability and growth objectives. Disclaimer: This report is published for general information only. Although high standards have been used in the preparation, Netscribes is not responsible for any loss or damage arising from use of this document. This document is the sole property of Netscribes and prior permission is required for guidelines on reproduction. 26