Indian Organized Retail: ‘Fair’re‘tale’ by SSKI

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Born of booming consumerism, Indian Organized Retail (IOR) is changing coursefrom emerging to surging. Driven by a shift to organized formats and ~7% growthin industry size, we see IOR as a US $35bn opportunity by 2010 (38% 5-year (CAGR). With funding no more a constraint, established retail networks can nowstrive for a more evolutionary development of existing models. However, acompressed evolution cycle demands that retailers simultaneously attain scale,strong business models and operating efficiency. This would also stand them ingood stead once the floodgates open to foreign competition. Though concernsabound on current valuations, we find valuations justified in view of thehumungous potential. We have an Overweight stance on the sector.
The buzz shows no signs of fading: Favourable socio-economic factors, that triggereda retail boom globally (USA in 1960s and China in 1990s), have fuelled consumerspending in India. Rising consumerism, availability of funds and quality retail spaceand growing confidence among stakeholders are converting the latent demand intobusiness. Based on our estimates of a 38% CAGR over FY05-10, we see IOR becominga USD 35bn opportunity by 2010.

Compressed evolution cycle: Even at abysmally low penetration of ~3%, India haswitnessed overlapping of multiple models. Being a late entrant, the evolution cycle ofIndian retail would be compressed, as seen in China earlier. In the development phase,players are finding it imperative to simultaneously go for speed, enhancement of business models and operating efficiency to capitalize on the opportunity.
Good things do not come cheap: Inferring that valuations of Indian retail companies(trading at a premium to global and regional peers) are stretched is unjustified as IOR is growing 5x global and 2x Asian peers. Also, global players traded at similar valuations in the development phase.

We believe valuations of Indian retalers are an indication ofthe growing confidence (and not hype) over the potential. We are Overweight on thesector with Pantaloon Retail, Provogue and Nilkamal Plastics as our top picks.
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