Shoppers Stop (SSL) has announced the sale of its entire stake (51.09%) in HyperCity to Future Retail (FRL). We expect the deal to be a win-win proposition for both players. FRL will gain access to prime locations in metros and HyperCity’s private labels. The company can easily turn HyperCity profitable in the first year itself by enhancing apparel share and pruning headquarter cost. SSL will get Rs 3,346 million for its 51.09 % stake and will use the cash proceeds to pare debt. Also, sharpened focus on core departmental business is likely to improve. EBITDA margin to 8.0% in FY19 from 3.5% in FY17. Maintain ‘Buy’.
HyperCity’s enterprise value is pegged at Rs 9,110 million, of which consideration stood at Rs 6,550 million and debt at Rs 2,560 million. FRL will pay the consideration partly in cash and partly via share issue. SSL will receive Rs 3,346 million consideration for its stake. The deal is expected to conclude in 3·5 months. HyperCity’s valuation at 0.78x FY17 EV/sales is a positive for SSL. Funds raised via HyperCity sale and preferential issuance to Amazon India will leave SSL with minimal debt and help sharpen focus on departmental business. We estimate consolidated EBITDA margin to improve to 8.0% in FY19 from 3.5% in FY17 as the HyperCity sale eliminates 150bps drag.
SSL is in a sweet spot as: 1) tie up with Amazon will boost omni channel; and 2) funds raised via Amazon deal and HyperCity sale will be utilised to prune debt. Hence, we change our valuation methodology for SSL from EV/sales to EV/EBITDA to capture improvement in the company’s EBITDA margin. We assign 17x FY19E EV/EBITDA to arrive at revised target price of `692. At CMP, the stock is trading at 13.0x FY19E EV/EBITDA. We maintain ‘Buy/SO’.
SSL is one of the best run retail companies and envisaged to reap benefits of its expansion strategy. We expect SSSG to be aided by normal monsoon and improvement in discretionary spends led by implementation of OROP and seventh pay commission coupled with direct benefit transfers. The company has maintained momentum in its retail space expansion even amidst slowdown, which is likely to aid future growth. SSL’s omni-channel strategy to counter online competition is on track.