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Home > Thoughts & Ideas > Retail: Is there a Wall Mart on Dalal Street?
Retail: Is there a Wall Mart on Dalal Street?
Feb 04, 2004

Wall Mart the American Retail giant has sales over US $ 250 billion, employs about 1.4 million people and has a market capitalization of US $ 254 billion (RS 10 lac crores). That is almost the total market capitalization of all the stocks taken together on the Bombay Stock Exchange.

Any investor who would have been fortunate and `foolish' enough to own the stock in 1970 and hold it till 1991 would have seen his money go up 1200 fold. That means an initial investment of Rs One lac would have fetched you RS 12 crores at the end of the stated period. I use the word foolish because investors have an allergy of holding stocks for such a long term and especially so when it performs well on the bourses. I have come across several investors holding dud stocks for years if they make losses but booking profits and gains on stocks that perform well. Perhaps the old adage Book profits would have been detrimental for the so-called sensible investors of Wall Mart in the early areas of growth.

How does all this relate to India?

The advent of a new sector pushes stocks to reach dizzy heights and then valuations do not matter. It happened to Cement and Steel sectors that were decontrolled during the early period of liberalization (1991), it happened to the EOU's in 1994 -95, it happened to the media (ZEE T.V) and the Software sector in the late nineties, it happened to the Banking sector post the NPA ordinance in the parliament it happened to all the generic Pharma manufacturers expected to gain post 2005, it happened to the Mobile telephony plays in the Indian market and it shall continue to happen to the pure BPO plays and to the Companies expected to benefit in the post 2005 Textile quota regime. The trick is to buy the leader at small a market capitalization and just hold on

The advent of the software industry in the mid nineties introduced India as a services powerhouse. The next big jump in the GDP is to come from the services sector that means that companies in Insurance , Finance , Entertainment, Media , Logistics , Telecommunication shall do exceedingly well. The recent example being Bharti (Airtel) when all analysts had discarded the stock at sub 30 levels thinking that Reliance Infocom would devour this small animal in the dog fight that ensued Bharti was a five bagger at 140 odd and Reliance Infocom continues to sell as many mobiles as it used to (How much cash it recovers through its billing systems is another issue altogether). When the sector opens up and the market is huge there is all likelihood of multi baggers being found by alert investors and competition does not matter in the initial stages. The question is like two friends finding the King Solomon's Gold Mines and there being enough gold for both of them to take back home.

The Industry

The Indian Retail market is estimated at around US $ 180 Billion. A Study by Mc Kinsey states that organized retail accounts for just around 2% presently is set to grow at exponential exceeding 35%

Retail Consumption areas US $ billion Existing Companies in the organized sector
Food Retailing 130 Food Bazaar (Pantaloon) Food World Subhishka.
Clothing & Apparel 12 Pantaloon Westside, Shoppers Stop
Jewellry, Watches 7 Tanishq, Titan , Gold Bazar (Pantaloon)
Home Furnishing 5 Home Store, Arcus (Pantaloon)
Foot wear 1.7 Bata , Woodlands
Beauty Care 3.6 VLCC, Health & Glow

The Opportunity

A rising GDP shall act as a catalyst and usher in a consumer boom. We are witnessing an economy that is consuming motorcycles and cars at never before pace. A notable thing of study would be more that 50% of India's population is before 25 years of age. Teenagers and the younger component of the population will be more interested to buy the product from the branded retailers This makes up for a huge number of potential consumers who would be more interested in buying branded items and from the organized section of the market rather then the traditional mom and pop stores format stores (local kirana outlets)

Fitch estimates the current share of organized retail to grow from 2% presently to around 15 to 20% by 2010.The rise should not be viewed as a 13 to 18% rise but more as a seven to ten fold rise in six odd years

Reasons for optimism
  • At over 1 billion India is the second most populated Country in the world and for retail to survive one must depend upon the domestic Economy

  • Favorable and interesting Demographic profile 81% the India's populations are below 45 years of age e & 54 % of the population is below 25 years of age.

  • The Economy has grown at an average CAGR of 6.6% in the last nine years and growing private consumption spending by 5% compounded annually since 1993 -94.

  • The rate of growth in urbanization is 3.2% that comprises around 28% of the population.

  • A precipitous fall in interest rate by over 500 basis points fuelling an increased retail spending

  • A CAGR of 16.6% in car sales for the period 1996 - 2000.

  • Organized retail shall provide pretty much the same items that are available from the local un-organized sector. - Lack of specific Value addition to products

  • Indians have been blamed for having a higher level of marginal propensity to save and lower rate of consumption from incremental income.

  • High Real Estate costs and space constraints for expansion of retail outlets in areas of potential markets

  • Barriers to Foreign Direct Investment and non-recognition of Industry status.

  • Complicated and complex Product taxation systems with multiple legislations

  • Lack of Human Resource specific to this Industry due to the nascent status of the Industry.

Will the entry of Foreign Retailers be a threat to the domestic players?

The entry of foreign retailers as a threat to domestic retail companies, if and when they are allowed to set up shops here. The Korean experience shows that even the likes of Wal-Mart had to tie up with locals to get into the industry there, and the same event would repeat itself in India too. More over India being a land of 18 languages 6400 castes and sub castes six religions about 24 major festivals every year would make it compulsively imperative for foreign retailers to seek local support when ever Foreign Direct Investment is opened up.

Have there been similar stories of growth in organized retail across the world?

The table given below shows the growth of the Retail Industry in the different economies of the developing world. It may be noted here that although growth has been exponential in the later years the start has sometimes been modest. Perhaps once critical mass is achieved the sector begins to gather growth momentum.

Country Share of organized retail Years taken for organized retail to grow from less the 5% to current levels Period of growth
Brazil 36% 15 1980 -1995
Thailand 40% 10 1988 -1998
Poland 20% 8 1991 -1999
China 10% 10 1990 - 2000

India is still at 2% share of organized retail after 5 years of first signs of interest in this sector. As Economics being different to mathematics makes it difficult to put in a linear path to growth something that the financial analysts expect Companies to do .It is therefore imperative that if the Mc Kinsey or Fitch report is to be believed in exponential growth is around the corner for the organized retail stores.

A study of the Global Retailing majors like Wal Mart and the likes establishes a Market cap to Sales Ratio of 1. If this argument is to hold good then each of the three top organized retailers should quote at a market cap of around US $ 1.5 Billion. Or Rs 6750 crores (taking an exchange rate of Rs 45). An extract from the Mc Kinsey report clearly establishes the following matrix:

Items If we are to follow China If we are to follow Thailand Key factor for Investors
Food Retailing 10% of organized sector US $ 12 billion Top 3 players US $ 1.2 billion each 40% Organized Retail Sector = Us $ 48 billion Top 3 players US $ 4.8 billion each Annual Sales of the top three Indian Retailers to be in the vicinity of US $1.5 billion each
Clothing 35% of organized sector US $ 12 billion Top 3 players US $ 300 million each No data available in the Mc Kinsey study  

Pure Retailing Companies listed on the Stock Exchanges Present Market Cap (Rs Crores) Projected FY 05 Sales (Rs) Potential multi bagger if the Mc Kinsey arguments are to hold good and India follows the China model (next 6 to 7 years)
Trent 300 230 crores 22 bagger*
Pantaloon 450 1000 crores 15 bagger*


Being a new Industry there is a possibility that both Trent and Pantaloon might not be able to keep up to the exponential growth rate and give way. This danger however far fetched it may seem is present should work like a caveat emptor for prospective investors. The development of a new sector throws up a lot of churns and twists and many companies are left at the wayside. It is here that Management capability and the ability of the leadership to co-exist with the changing dynamics of the Industry is to be taken into record. Many would rightly argue that the model for showing these Companies as multi baggers is too simplistic and naive. How ever the arguments given above only reflect to some kind of an expected event in terms of price over the long term. Hope as many would say is a four-letter word but as they say there is no life without hope. In subsequent reports I would like to discuss each of these companies individually.

The author is a long-term investor in both these stocks and invites comment at & .