Professional Documents
Culture Documents
Project On: Department of Business Economics
Project On: Department of Business Economics
PROJECT ON
FUNDAMENTAL ANALYSIS
OF
STOCK MARKET
SESSION 2007-09
Submitted By
SUMAN
With great happiness and gratitude,I would also like to extend my sincere
thanks to my mentor Mr.Sanjay Nandal, for all his support and guidance.
Suman
MBA(BE)III SEMESTER
(2007-09)
INDEX
Executive Summary
Objective
Company’s Profile Hira stocks solution pvt.ltd.
SWOT analysis of
Introduction to fundamental analysis
Research Methodology
Economy and industry analysis
Company analysis
limitations
Recommendations
Conclusion
Learning
Bibliography
EXECUTIVE SUMMARY
Indian Capital Market is vibrant and alive. Its growth in last two decades has
been phenomenal. Share market can make a person wealthy beyond their
wildest dream. After many scams (Harshad Mehta and Ketan Parekh) today
also, share are bought and sold on the basis of tips and for the short term. My
Project i.e. Fundamental Analysis will introduce you to the rational aspect of
this share market. Fundamental Analysis is for rational man. This project will
take us to the world of Fundamental Analysis and guide us through the
factors that we should look at before we buy any share.
This report is divided into four parts. In first part, I have explained the
quantitative (various ratios like EPS, P/E ratio) as well as qualitative aspect
(management, corporate governance, competition, customers) for analysis.
Part second deals with economic analysis, retail industry analysis and
company (Vishal Mega Mart) analysis. Part third provide the comparison
between Vishal and other companies like Pantaloon, Provogue, Shopper’s
stop, Trent in retail industry. Last part summarizes the report and provides
recommendations based upon interpretation of analysis.
Fundamental analysis is performed on historical and present data, but with the
goal of making financial forecasts. There are several possible objectives:
Hira stocks solution is one of the emerging stock broking companies in India.
The company is the master franchisee of well known companies
IL&FS(Investment leasing and financial services) and India Info line. It
provides trading and investment solution to the investors. Hira stock is
catering to a gamut of investors including individual, corporate, retail and
high net worth clients.
SERVICES
Trading
Online trading – NSE (Cash and F&O), BSE,NCDEX,MCX
Internet trading – NSE (Cash and F&O) & BSE
Depository
NSDL – Depository Participant
Speed E & IDEAS – for online punching
Holdings available on NET at hirastocks.com
Lowest transaction charges in India
Leveraging
Margin trading facility
F&O margin against approved securities
Hira stocks solution pvt. ltd. is a renowned and customer focused financial
market intermediary in the fast expanding financial sector and has achieved
significant success and visibility in the market.
STRENGTHS:
1. Hira stocks with its trading and investment solution facility it also provide
research facility.
2. Managing Director of the company is a research analyst.
3. Next strength is its associated business model. Their business model
includes sub-brokers, Business Associates, Franchisee and branches in
various parts of country.
WEAKNESS:
OPPORTUNITIES:
There are lots of areas which are still to be probed by hira stocks like
THREATS:
1. Competition in stock market is going to increase as more and more new
players keen on entering the market. The PWC report said that various
shareholding companies are set to make their presence felt in India in a big
way. Some of them are known globally for their specialization in structured
products and offering an array of different choices and facilities to their
clients. So new Indian as well as global players are coming to Market to
give a threat to exiting players.
2. Investor’s education and cost effectiveness are the major issues and
challenges before Mutual Funds industry.
3. Direct marketing may pose a threat to the company by cutting existing
customer base of various business associate and may create rivalry among
them in order to excel from each other.
INTRODUCTION
Fundamental Analysis is the cornerstone of investing. In fact, some would say
that you aren't really investing if you aren't performing fundamental analysis.
Because the subject is so broad, however, it's tough to know where to start. There
are an endless number of investment strategies that are very different from each
other, yet almost all use the fundamentals.
The biggest part of fundamental analysis involves delving into the financial
statements. Also known as quantitative analysis, this involves looking at revenue,
expenses, assets, liabilities and all the other financial aspects of a company.
Fundamental analysts look at this information to gain insight on a company's
future performance. A good part of this project will be spent learning about the
balance sheet, income statement, cash flow statement and how they all fit
together.
But there is more than just number crunching when it comes to analyzing a
company. This is where qualitative analysis comes in - the breakdown of all the
intangible, difficult-to-measure aspects of a company.
Fundamental analysis serves to answer questions, such as:
Is the company’s revenue growing?
Is it actually making a profit?
Is it in a strong-enough position to beat out its competitors in the future?
Is it able to repay its debts?
Is management trying to cook the books?
Fundamental analysis propounds that the intrinsic value is and has to be based on
the benefits that accrue to investors in the share. As the return to shareholders is
in the form of dividends, under strict fundamental analysis, the present value of
future dividends discounted on the basis of its perceived safety or risks is its
intrinsic value. The intrinsic value is based on the dividend because that is what a
shareholder or investor receives from a company.
If the market price of the share is below Rs.120.88 then the share is below its
intrinsic value and therefore well worth purchasing. If, on the other hand, the
market price is higher, it is a sell signal and the share should be sold.
Fundamental analysis is divided into three distinct parts:
1. The economy
2. The industry within which the company operates
3. The company
Business Model
Even before an investor looks at a company's financial statements or does any
research, one of the most important questions that should be asked is: What
exactly does the company do? This is referred to as a company's business model
– it's how a company makes money. You can get a good overview of a company's
business model.
Sometimes business models are easy to understand. Take McDonalds, for
instance, which sells hamburgers, fries, soft drinks, salads and whatever other
new special they are promoting at the time. It's a simple model, easy enough for
anybody to understand.
Competitive Advantage
Another business consideration for investors is competitive advantage. A
company's long-term success is driven largely by its ability to maintain a
competitive advantage - and keep it. Powerful competitive advantages, such as
Coca Cola's brand name and Microsoft's domination of the personal computer
operating system, create a moat around a business allowing it to keep competitors
at bay and enjoy growth and profits. When a company can achieve competitive
advantage, its shareholders can be well rewarded for decades.
Management
Just as an army needs a general to lead it to victory, a company relies upon
management to steer it towards financial success. Some believe that management
is the most important aspect for investing in a company. It makes sense - even the
best business model is doomed if the leaders of the company fail to properly
execute the plan. So how does an average investor go about evaluating the
management of a company?
This is one of the areas in which individuals are truly at a disadvantage compared
to professional investors. We can't set up a meeting with management if you want
to invest a few thousand dollars. On the other hand, if we are a fund manager
interested in investing millions of dollars, there is a good chance we can schedule
a face-to-face meeting with the upper brass of the firm.
Every public company has a corporate information section on its website. Usually
there will be a quick biography on each executive with their employment history,
educational background and any applicable achievements.
Instead, here are a few ways for you to get a feel for management:
1. Conference Calls
The chief executive officer (CEO) and the Chief Financial Officer (CFO) host
quarterly conference calls. (Sometimes we'll get other executives as well.) The
first portion of the call is management basically reading off the financial results.
What is really interesting is the question-and-answer portion of the call. This is
when the line is open for analysts to call in and ask management direct questions.
Answers here can be revealing about the company, but more importantly, listen
for candor. Do they avoid questions, like politicians, or do they provide forthright
answers?
4. Past Performance
Another good way to get a feel for management capability is to check and see
how executives have done at other companies in the past. We can normally find
biographies of top executives on company web sites. Identify the companies they
worked at in the past and do a search on those companies and their performance.
Corporate Governance
Customers
Some companies serve only a handful of customers, while others serve millions.
In general, it's a red flag (a negative) if a business relies on a small number of
customers for a large portion of its sales because the loss of each customer could
dramatically affect revenues. For example, think of a military supplier who has
100% of its sales with the U.S. government. One change in government policy
could potentially wipe out all of its sales.
Market Share
Understanding a company's present market share can tell volumes about the
company's business. The fact that a company possesses an 85% market share tells
us that it is the largest player in its market by far. Market share is important
because of economies of scale. When the firm is bigger than the rest of its rivals,
it is in a better position to absorb the high fixed costs of a capital-intensive
industry.
Industry Growth
One way of examining a company's growth potential is to first examine whether
the amount of customers in the overall market willgrow. This is crucial because
without new customers, a company has to steal market share in order to grow.
Competition
Simply looking at the number of competitors goes a long way in understanding
the competitive landscape for a company. Industries that have limited barriers to
entry and a large number of competing firms create a difficult operating
environment for firms.
One of the biggest risks within a highly competitive industry is pricing power.
This refers to the ability of a supplier to increase prices and pass those costs on to
customers. Companies operating in industries with few alternatives have the
ability to pass on costs to their customers. A great example of this is Wal-Mart.
They are so dominant in the retailing business, that Wal-Mart practically sets the
price for any of the suppliers wanting to do business with them. If you want to
sell to Wal-Mart, you have little, if any, pricing power.
Regulation
Certain industries are heavily regulated due to the importance or severity of the
industry's products and/or services. As important as some of these regulations are
to the public, they can drastically affect the attractiveness of a company for
investment purposes.
In industries where one or two companies represent the entire industry for a
region (such as utility companies), governments usually specify how much profit
each company can make. In these instances, while there is the potential for
sizable profits, they are limited due to regulation.
In other industries, regulation can play a less direct role in affecting industry
pricing. For example, the drug industry is one of most regulated industries. And
for good reason - no one wants an ineffective drug that causes deaths to reach the
market. As a result, Food and Drug Administration (FDA) requires that new
drugs must pass a series of clinical trials before they can be sold and distributed
to the general public. However, the consequence of all this testing is that it
usually takes several years and millions of dollars before a drug is approved.
Keep in mind that all these costs are above and beyond the millions that the drug
company has spent on research and development.
Earning per share is generally considered to be the single most important variable
in determining a share's price. It is also a major component of the price-to-
earnings valuation ratio.
For example, Company A had earnings of $100 and 10 shares outstanding, which
equals an EPS of 10 ($100 / 10 = 10). Company B had earnings of $100 and 50
shares outstanding, which equals an EPS of 2 ($100 / 50 = 2).
So, we should go buy Company A with an EPS of 10, right? Maybe, but not just
on the basis of its EPS. The EPS is helpful in comparing one company to another,
assuming they are in the same industry, but it doesn’t tell you whether it’s a good
stock to buy or what the market thinks of it. For that information, we need to look
at some ratios also.
An important aspect of EPS that's often ignored is the capital that is required to
generate the earnings (net income) in the calculation. Two companies could
generate the same EPS number, but one could do so with less equity (investment)
- that company would be more efficient at using its capital to generate income
and, all other things being equal would be a "better" company. Investors also
need to be aware of earnings manipulation that will affect the quality of the
earnings number. It is important not to rely on any one financial measure, but to
use it in conjunction with statement analysis and other measures
The P/E looks at the relationship between the stock price and the company’s
earnings. The P/E is the most popular metric of stock analysis, although it is far
from the only one you should consider.
You calculate the P/E by taking the share price and dividing it by the company’s
EPS.
P/E = Stock Price / EPS
For example, a company with a share price of $40 and an EPS of 8 would have a
P/E of 5 ($40 / 8 = 5).
What does P/E tell you? The P/E gives you an idea of what the market is willing
to pay for the company’s earnings. The higher the P/E the more the market is
willing to pay for the company’s earnings. Some investors read a high P/E as an
overpriced stock and that may be the case, however it can also indicate the
market has high hopes for this stock’s future and has bid up the price.
Conversely, a low P/E may indicate a “vote of no confidence” by the market or it
could mean this is a sleeper that the market has overlooked. Known as value
stocks, many investors made their fortunes spotting these “diamonds in the
rough” before the rest of the market discovered their true worth.
What is the “right” P/E? There is no correct answer to this question, because part
of the answer depends on our willingness to pay for earnings. The more we are
willing to pay, which means we believe the company has good long term
prospects over and above its current position, the higher the “right” P/E is for that
particular stock in our decision-making process.
Calculated as:
P/B = Share Price / Book Value Per Share
A lower P/B ratio could mean that the stock is undervalued. However, it could
also mean that something is fundamentally wrong with the company. As with
most ratios, be aware that this varies by industry. On the other hand high P/B
ratio signifies that investors have tremendous confidence in the growth prospects
of the company. It can also suggest that the assets may be understated.
A high debt/equity ratio generally means that a company has been aggressive in
financing its growth with debt. This can result in volatile earnings as a result of
the additional interest expense.
The debt/equity ratio also depends on the industry in which the company
operates. For example, capital-intensive industries such as auto manufacturing
tend to have a debt/equity ratio above 2, while personal computer companies
have a debt/equity of under 0.5.
Calculated as:
ROCE should always be higher than the rate at which the company borrows;
otherwise any increase in borrowing will reduce shareholders' earnings.
Calculated as:
Current Ratio
A liquidity ratio which measures the company's ability to pay short-term
obligations.
Calculated as:
The ratio is mainly used to give an idea of the company's ability to pay back its
short-term liabilities (debt and payables) with its short-term assets (cash,
inventory, receivables). The higher the current ratio, the more capable the
company is of paying its obligations. . A ratio under 1 suggests that the
company would be unable to pay off its obligations if they came due at that
point. While this shows the company is not in good financial health,
The current ratio can give a sense of the efficiency of a company's operating
cycle or its ability to turn its product into cash. A high number may suggest that
management has so much cash in hand means they are doing poor job of
investing it.
Asset Turnover
The amount of sales generated for every dollar's worth of assets. It is calculated
by dividing sales by assets.
Formula:
Asset turnover measures a firm's efficiency at using its assets in generating sales
or revenue - the higher the number the better. It also indicates pricing strategy:
companies with low profit margins tend to have high asset turnover, while those
with high profit margins have low asset turnover.
Inventory Turnover
A ratio showing how many times a company's inventory is sold and replaced over
a period.
A low turnover implies poor sales and, therefore, excess inventory. A high ratio
implies either strong sales or ineffective buying.
High inventory levels are unhealthy because they represent an investment with a
rate of return of zero. It also opens the company up to trouble- should prices
begin to fall.
Formula:
By maintaining accounts receivable, firms are indirectly extending interest-free
loans to their clients. A high ratio implies either that a company operates on a
cash basis or that its extension of credit and collection of accounts receivable is
efficient.
A low ratio implies the company should re-assess its credit policies in order to
ensure the timely collection of imparted credit that is not earning interest for the
firm.
The lower the ratio, the more the company is burdened by debt expense. When a
company's interest coverage ratio is 1.5 or lower, its ability to meet interest
expenses may be questionable. An interest coverage ratio below 1 indicates the
company is not generating sufficient revenues to satisfy interest expenses.
BETA
Beta is a measure of a stock's volatility in relation to the market. By definition,
the market has a beta of 1.0, and individual stocks are ranked according to how
much they deviate from the market. A stock that swings more than the market
over time has a beta above 1.0. If a stock moves less than the market, the stock's
beta is less than 1.0. High-beta stocks are supposed to be riskier but provide a
potential for higher returns; low-beta stocks pose less risk but also lower returns.
RESEARCH METHODOLOGY
The research design used for the present study is descriptive in nature. The major
purpose of descriptive study is description of the state of affairs as it exits at
present. The main characteristics of this design are that is used when researcher
has no control over the variables.
Sampling Unit
The sampling unit is individual.
Sampling Procedure
Sampling procedure is convenience sampling.
(C) Tools and Techniques of Analysis:
Data is analyzed using:-
Tables
Figures
Graphs
Primary Data:
Secondary Data:
Primary Data: Primary data is the data which is collected afresh. The
data is collected directly from the customers or target audiences. It is not
used by me in this project. These data are more reliable but more costly.
Secondary Data: Secondary data is the data which is used from a
source which has already been used by someone else in his research. These
data are less costly but less reliable.
I have used secondary data in form of-
Books
Annual Reports
Newspapers
Websites
ECONOMY AND INDUSTRY ANALYSIS
A wise man once said, “No man is an island”. No person can work and live in
isolation. External forces are constantly influencing an individual’s actions
and affecting him. Similarly, no industry or company can exit in isolation. Its
sales and costs are affected by many factors, some of which are beyond its
control- the world economy, price inflation, taxes etc. So it is important to
have knowledge about the political-economic factors of a country.
Furthermore, despite the rapid growth, poverty remains a real problem, especially
in rural India. In 2008 and beyond India faces the real challenge of making sure
that all sections of the population continue to benefit. Current estimates suggest
that 27% of the Indian population live below the poverty line. Oil and food
shortages combined with rising inflation have created a sense of economic crisis
in India. Gross domestic product growth is now expected to moderate to 7.5-7.8
per cent in 2008-09, lower than the previous forecasts of 8-8.5 per cent,
Indian Retail Industry is ranked among the ten largest retail markets in the world.
The attitudinal shift of the Indian consumer in terms of 'Choice Preference',
'Value for Money' and the emergence of organized retail formats have
transformed the face of Retailing in India. As per CRIS INFAC Report, 2007, the
Indian retail industry is currently estimated to be a US$200 billion industry and
organized Retailing comprises of 3 per cent (or) US$6.4 Billion of the retail
industry. With a growth over 20 percent per annum over the last 5 years,
organized retailing is projected to reach US$ 30 Billion by 2010.
Retailing in India is gradually inching its way to becoming the next boom
industry. The whole concept of shopping has altered in terms of format and
consumer buying behavior, ushering in a revolution in shopping. Modern retail
has entered India as seen in sprawling shopping centers, multi-storied malls and
huge complexes offer shopping, entertainment and food all under one roof.
Retail is India's largest industry, accounting for over 10 percent of the country's
GDP and around 8 percent of employment. Retail in India is at the crossroads. It
has emerged as one of the most dynamic and fast paced industries with several
players entering the market.
The Indian retailing sector is at an inflexion point where the growth of organized
retail and growth in. Consumption by Indians is going to adopt a higher growth
trajectory. The Indian population is witnessing a significant change in its
demographics. A large young working population with median age of 24 years,
nuclear families in urban areas, along with increasing working-women population
and emerging opportunities in the services sector are going to be the key growth
drivers of the organized retail sector.
E - Estimated
P - Projected
Source: CRIS INFAC, 2007
Urban Rural
Population Population
1990 26 74
1995 27 73
2000 28 72
2005 29 71
2010 30 70
2015 32 68
WEAKNESS:
1) Limited Reach: Although big retail stores are going to set up their outlets in
rural and remote areas. Still there are places where there is no retail store.
Pantaloon is toying with the idea based on a study conducted in Mumbai where
two-third of the population lives in slums and 60% of them are migrants. The
study analyzed the lifestyle, earnings, spending behaviour, consumption pattern
and attitude toward shopping destinations and brands. The study found that the
slum dwellers don’t visit the modern shopping stores as it’s time and money
consuming, perceived expensive. Also, they don’t feel comfortable
among educated and middle-class people and are apprehensive about kid’s
reactive demands
OPPORTUNITIES:
1) Rural Retaining: The Indian rural market with its vast size and demand base
offers great opportunities to marketers. Two-thirds of countries consumers live in
rural areas and almost half of the national income is generated here. The Indian
rural market with its vast size and demand base offers a huge opportunity that
MNCs cannot afford to ignore. Companies like DSCL and Godrej who had
significant agri-business interests, set them up to meet the needs of farmers in a
store’s catchments area.
2) Higher level of working women: According to the 2001 census report, the
population of working women has increased from 22 per cent in 1991 to 26 per
cent in 2001. The purchasing habit of a working woman is different from that of a
housewife, since the former has lesser time to devote to the task. Working women
would prefer a one-stop shop for purchasing their regular products. Also, a
working woman's propensity for spending is higher than that of a housewife.
4) Baby boomer effect: There has been a strong demographic shift in India's
population distribution. The percentage of the earning population (15 to 60 yrs) in
the total population is rising. This will increase the overall purchasing capacity in
the country, propelling growth in the retail segment.
5) Increased use of credit cards and availability of cheap finance: The use of
plastic money (credit and debit cards) has increased significantly in the last 4-5
years. In fact the ease of payments (ability to spend without cash) due to the use
of credit and debit cards, has also led to an increase in total spending on shopping
and eating out. With the acceptance of and the increase in the number of
electronic data converter machines installed in retailing outlets, we believe credit
and debit cards will provide further, fillip to organized retail.
3) Protests from small shop keepers: retail industry is facing a great threat from
kirana stores, convenience stores. Reliance, which plans to spend US$6bn on
expansion over the next four years, has seen its ambitions take a hit from
opposition from local traders wary of competition in India's fast-growing retail
sector.
The state government in Uttar Pradesh, India's most populous state ordered the
closure of ten Reliance Fresh outlets last month following the protests.
Segments in Retail
Retail as a whole can be broken into various categories, depending on the types
of products serviced. Food and groceries has the biggest share in the retail pie,
accounting for the around 76%. However, it has the lowest organized retail
penetration. This is indicative of the opportunity for organized retail growth in
this segment. The footwear and clothing segments have the highest penetration of
organized retail.
Category A B C D E
Food, beverage and tobacco 7738 75.8 65 19 1
Clothing and textile 716 7 141 40 20
Consumer durables 416 4.1 43 13 10
Jewelleries 416 4.1 25 7 6
Home décor and furnishing 300 2.9 25 7 8
Beauty care products 214 2.1 7 2 3
Footwear 104 1 32 9 31
Books, music and gifts 87 0.8 11 3 13
Total 9990 100 349
%
Category Fiscal 2007 Fiscal 2006 growth
Apparel 3800968337 2043676792 85.98
FMCG 905884507 257489344 251.32
Non Apparel 1314429767 580538128 124.41
Grand Total 6021282611 2881064264 108.92
MANAGEMENT
The group had a turnover of Rs. 1463.12 million for fiscal 2005, under the
dynamic leadership of Mr.Ram Chandra Aggarwal. The group’s prime focus is on
retailing. The Vishal stores offer affordable family fashion at prices to suit every
pocket.
The group’s philosophy is integration and towards this end has initiated
backward integration in the field of high fashion by setting up a state of the art
manufacturing facility to support its retail endeavors.
COMPANY’S GOAL
Company goal is to provide a range of fashion wear to suit every pocket. Our
product mix represents the most current fashion trends in tops, bottoms, formals
and accessories for men, women and kids. Our courteous staff will ensure that
consumers get a perfect fit.
INFRASTRUCTURE
Vishal Retail Ltd. has a factory in Gurgaon, Haryana. This factory has more than
700 imported machines that have a capacity to manufacturer 1,50,000 pieces a
month. The factory occupies 80000 sq ft of covered space. The Vishal group
indirectly gives employment to more than a 1000 people. These people work in
ancillaries that supply finished goods to the company.
PRODUCT CATEGORIES
Home Furnishing
Food Mart
Sports & Fitness
Footwear
Telemart
Men’s Wear
Ladies Accessories
Infants
Women
Kids Boy
Kids Girl
Travel Accessories
Household
Lifestyle
Toys & Games
Stationary
SWOT ANALYSIS OF VISHAL MEGA MART
STRENGTHS:
1) Understanding of the 'value retail' segment: Its business plan involves
implementation of the concept of the 'value retailing', targeting the middle and
lower middle income groups, which constitute majority of the population in
India. They intend to provide quality products at competitive prices. Their
emphasis has been to maximize the value that the customers derive in spending
on goods bought in our stores. They endeavor to continuously reduce their costs
through a variety of measures, such as, in-house production of apparels,
procurement of goods directly from the small and medium size vendors and
manufacturers, efficient logistics and systems along with customized product mix
at their stores depending on the regional customer behavior and preferences.
Central to its value retail strategy is to pass on the benefits of cost reduction
measures to customers.
5) Identifying new locations: They believe that they possess the ability to
identify locations with potential for growth, in particular in Tier II and Tier III
cities. They have an exclusive site identification and assessment team, which
undertakes systematic analysis of the business prospects, taking into account
factors such as population, literacy levels and nature of occupation, income
levels, accessibility, basic infrastructure and establishment and running costs.
Further, they have a dedicated warehouse for the purposes of storing the materials
essential for setting up of new stores.
8) Focus on private labels: Their objective has always been to offer quality
products at the minimum possible cost. Thus, the company strives to offer
differentiated products that are not available elsewhere at very competitive prices,
by either manufacturing them in house or directly sourcing them from
manufacturers. Their Core strength lies in garment manufacturing and the ability
to understand the apparel business, which has translated into an active and strong
Private label offering. Further, in house manufacturing (private labels)
contributed 9.68% of their total sales in fiscal 2007 aggregating Rs.583.58
million.
OPPORTUNITIES:
1) Presence in Tier II and Tier III cities: They are operating 45 Stores out of 53
Stores in India in the Tier II and Tier III cities. They are having strong presence in
these cities. Big players have not ventured into these cities. In Future, they would
be operating more stores in such cities and aid in the development of the
organized Retail Industry in such cities
2) New Retail Format: They are in the process of launching Convenient Stores
and Specialty stores all over India, by which we would be able to reach every
consumer and also gain a wide spread geographical presence all over the India.
These stores would be spread in the area of approximate 5,000-10,000 Sq. Ft.
They have already identified some of the suitable locations for the same and
have entered into Memorandum of Understanding with some of the owners
for running these stores from their premises.
3) Booming Industry Scenario: The Retail Industry, which was a few time back
at the nascent stage, is progressively moving forward to become the biggest
industry contributing a large chunk of resources in the development of economy.
The Industry is having a CAGR of 25%, which is supposed to increase further.
They, being one of the major Retailers in the Industry, will be garnering a strong
share in the Retail Industry growth and providing value for money to their
stakeholders.
4) Private Labels: Their objective has always been to offer quality products at
the minimum possible costs. Thus, they strives to offer differentiated products
that are not available elsewhere at very competitive prices, by either
manufacturing them in house or directly sourcing them from manufacturers.
They have a number of in house brands which are contributing significantly to
our total revenues. They would be launching more products under their private
labels, which will pave the way for their margins and create a strong value for
their stakeholders.
No. of
Age Employees
18-24 3793
25-35 2178
35 and
above 830
Total 6801
No. of
Education Employees
Under
Graduates 4060
Graduates 2498
Post Graduates 243
Total 6801
8) Training: Their Key focus has been to change the mindset from 'human
resource utilization' to 'nurturing and leveraging talent'. They believe in investing
in people competencies for the business requirements of tomorrow. In essence,
they wish to train their employees to become next generation entrepreneurs, who
can effectively lead the growth of our business. They have created a favourable
work environment that encourages innovation and meritocracy. They are in the
process of putting up a scalable recruitment and human resource management
process, which will enable them to attract and retain high caliber employees &
meet the challenges of the Retail Industry.
9) Internal Control System and their adequacy: The Company has installed
adequate internal control systems and procedures commensurate with the size and
nature of the business. The Company has implemented SAP to ensure that proper
checks and balances are in place to ensure the functioning of Internal Control
Systems. The discrepancies pointed out by their Internal Control System are
taken care of and proper actions are taken on the same, after taking approval of
the Audit Committee on the same.
CONCERNS OR THREATS
1) Execution Risks: Although the Industry growth potentially appears to be
immense and they are having a tract record of capturing such opportunities, we
have to steadily keep up with the pace of Industry growth. We face two type of
Execution Risk.
2) Retaining existing talent and acquiring new talent will present a huge
challenge: The Organized Retail Industry is expected to reach US$ 30bn by
2010, for which it will be requiring 0.5mn of people. With the entry of new big
players into the market, such as Wal-Mart, Reliance and the huge expansion of
existing big Retailers, they would be witnessing a huge amount of poaching
leading to an increase in employee cost thereby impacting margins.
Turnover Ratios
Fixed Assets 6.74 8.24 8.06
Inventory 3.68 4.99 5.07
Debtors 5739.52 6409.78 0
Interest Cover
Ratio 3.5 7.05 6.1
PBIDTM (%) 11.68 9.38 6.08
PBITM (%) 9.14 7.52 4.09
PBDTM (%) 9.07 8.31 5.41
CPM (%) 6.7 6.15 4.06
APATM (%) 4.16 4.3 2.06
ROCE (%) 22.13 24.02 16.11
RONW (%) 25.86 25.44 13.89
=PAT/OUTSTANDING SHARES
= 25.06/1.832=13.67
=MARKET PRICE/EPS
=644.8/18.14=35.55
=P/E/EPS GROWTH
=35.55/32.6=1.09
=DEBT/EQUITY
=216.3/126.76=1.70
=55.08/248.86=22.13
=PAT/NET WORTH
=25.06/96.925=25.86
DIVIDEND YIELD
=0/644.8=0
Some of the significant events that took place during the Fiscal year 2007 were as
follows:
1) 27 new stores were opened, aggregating to an area of 770,890 square feet. Our
store at Hyderabad has been shifted to another location at the same place with a
higher area and also we have closed our operations at Siliguri First store and have
opened another store 'Siliguri Second' with a higher area. Our stores located at
Meerut, Agra were closed due to fire in such store.
3) During Fiscal year 2007 we have tested and partly implemented SAP ERP
package for management information system. During the transition face from old
information package to new ERP system, we faced operational difficulties in
terms of delayed and improper receipt of operational data particularly of sales.
This has even led to over stocking of the materials to overcome the replenishment
requirements of the company.
4) Profit after Tax: Net profit increased by 102.36% to Rs. 250.67 mn in Fiscal
year 2007 from Rs. 123.87 mn in Fiscal year 2006-07. The increase was mainly
on account of increase in sales due to opening of new stores, change in sales mix
with an increase sales mix of non apparel goods with better net margins and
FMCG products.
5) Other Income: Other income earned in Fiscal year 2007 was Rs. 23.90
million in comparison to Rs. 6.46 million in Fiscal year 2006, an increase of
254.80%. This increase was mainly on account of increase in display charges on
account of FMCG goods, receipt of commission on account of issuance of credit
card under the co-branded card agreement with SBI Cards & Payment Services
Private Limited
6) Capital Employed: The total capital employed in the business increased by
Rs. 242,208,720/- in 2006-07. This is reflected in the liabilities side of the
balance sheet of the company through an increase in borrowing by Rs.
1,881,592,013/- and an increase in share capital by Rs. 540,616,707/-.
7) Capital Structure:
*The Company has authorized equity share capital of Rs. 25.00 Crores
comprising 2.50 Crores equity shares of Rs. 10/- each and authorized preference
share capital of Rs. 5.84 Crores divided into 4.00 Lacs preference shares of
Rs.146/- each.
*The paid up equity share capital of the Company increased from Rs.164,906,050
in financial year 2005-06 to 183,247,950/- in 2006-07. Further 3, 84,190
Preference Shares of Rs.146/- were converted in to equity shares at a price of Rs.
146/- each during the year under review. The company has issued and allotted
12,50,000 equity shares of Rs. 10/- each at a premium of Rs. 190/- each to 49
investors on July 02, 2006 and further 2,00,000 equity shares of Rs.10/- each
were allotted to HDFC Ltd. at a premium of 190/-each.
8) Loan Profile:
* Loans increased from Rs. 550,480,922/- to Rs. 2,432,072,935/- during the
financial year 2006-07.The secured loans increased from Rs. 476,105,922/- in
2005-06 to Rs. 2,162,954,208/- in the financial year 2006-07. The unsecured
loans increased from Rs. 74,375,000/- in 2005-06 to Rs.269,118,727/- in 2006-
07. The secured loan is primarily on account of working capital facility and cash
credit limit to finance the operations and to maintain the liquidity of the company.
*The total Debt equity ratio stood at 1.71:1 in 2006-07 as compared to 0.76:1 in
2005-06. The debt is primarily consists of working capital facility and cash credit
limit
10) Intra Group Transaction: There were no Intra group transactions during the
financial year 2006-07. Gross Block Size and Nature of Assets:
*The Company's gross block of assets increased from Rs. 459,934,501/-in the
financial year 2005-06 to Rs. 1,329,272,543/-exclusive of Capital work in
progress.
The Capital Work in progress decreased from Rs. 46,404,301/- in the financial
year 2005-06 to Rs.10,877,703/- in the financial year 2006-07.The ratio of sales
to gross block has declined from 6.24 in 2005-06 to 4.53 in 2006-07
12) Staff Costs: Staff costs increased in Fiscal year 2007 to Rs. 274.08 million as
compared to Rs. 135.44 million in Fiscal year 2006. The increase in employee
cost is mainly on account of recruitment of employees for new stores opened
during fiscal year 2007 and administrative staff in the head office. As a
percentage of total sales, it decreased from 4.70% in Fiscal year 2006 to 4.55% in
Fiscal year 2007.
14) Interest Outflow: Interest and finance charge has increased from Rs.
29,115,275 in the Fiscal year 2006 to Rs. 147,536,359 in the Fiscal year 2007.
The increase is due to loans taken from the banks/Financial Institutions for
financing the future expansion plans of the Company.
COMPETITIVE ANALYSIS:
INDUSTRY SCORE CARD
KEY RATIOS
4) Now talking about P/E ratio, it seems that public has more
confidence in Provogue than other companies. But industry P/E
shows that it is 62.33. So, looking at industry P/E ratio it is
pantaloon indicating that market has high hopes for this stock’s
future and has bid up the price. Provogue and Pantaloon seems to be
overpriced and Vishal is striving to achieve industry P/E.
8) Fixed assets ratio shows efficiently companies use its assets. Higher
the ratio, better it is. It is showing that Vishal and Provogue is using
efficiently its assets.
11) ROCE and RONW both are indicating that Vishal is doing a good
job. But here we can also deduce that Vishal is using more debt
than any other companies which is making RONW a bright figure
among them.
PROJECTION ON FUTURE
PERFORMANCE
ANALYSIS
Strong Growth in Revenues with Improvement in
Profitability
1. Total Revenues up 68% from Rs. 6,050.4mn to Rs 10,144.6mn
driven by addition in retail space, increased footfalls &
increased conversion ratio
1.1. Added retail space of 902,346 sq. ft. taking the total to 2,161,902 sq. ft.
1.2. Daily footfalls increased by 103% from 89,829 to 182,396
1.3. Conversion ratio improved from 42.2% to 43.1%
1.4. Average ticket size declined by 25.3% from Rs 550 to Rs 410.6 due to
increased focus on FMCG Sales
2. EBITDA up 86% from Rs. 694.3mn to Rs. 1,291.0mn
EBITDA margin increased by 120bps from 11.5% to
12.7% (in spite of marginal decline in sales per sq ft from
Rs 7,023 to Rs 6,785) due to:
Increase in private labels sales from 9.8% of FY’07 sales to 14.9% of FY’08
2) Industry/Company Specific
Valuation techniques vary depending on the industry group and specifics of each
company. For this reason, a different technique and model is required for
different industries and different companies. This can get quite time-consuming,
which can limit the amount of research that can be performed.
3) Subjectivity
Fair value is based on assumptions. Any changes to growth or multiplier
assumptions can greatly alter the ultimate valuation. Intrinsic value of a share can
and will be different for different individuals and also the assumptions expected
price at the end of a period are subjective.
4) Analyst Bias
The majority of the information that goes into the analysis comes from the
company itself. Companies employ investor relations managers specifically to
handle the analyst community and release information. Only buy-side analysts
tend to venture past the company statistics. Buy-side analysts work for mutual
funds and money managers. They read the reports written by the sell-side
analysts who work for the big brokers These brokers are also involved in
underwriting and investment banking for the companies. When reading these
reports, it is important to take into consideration any biases a sell-side analyst
may have. The buy-side analyst, on the other hand, is analyzing the company
purely from an investment standpoint for a portfolio manager. If there is a
relationship with the company, it is usually on different terms. In some cases this
may be as a large shareholder.
5) Definition of Fair Value
When market valuations extend beyond historical norms, there is pressure to
adjust growth and multiplier assumptions to compensate. If We values a stock at
50 times earnings and the current assumption is 30 times, the analyst would be
pressured to revise this assumption higher. There is an old adage: the value of any
asset (stock) is only what someone is willing to pay for it (current price). Just as
stock prices fluctuate, so too do growth and multiplier assumptions. Are we to
believe stock price or the analyst and market assumptions?
1) Vishal Retails inventory days shot up from 99 to 151 days in FY07. This pile
up of inventory locks up working capital and may result in the inventory having
to be sold at low prices. It should manage zero (minimum) inventory level and
maintain good relationship with supplier so that whenever they require inventory,
it should be replenished soon.
2) Owing to the competition in the retail sector the company will have to witness
poaching. To confront this situation, company should provide efficient salary and
compensation plans, a good ambience and growth opportunities by providing
efficient training programmes.
3) Vishal has concentrated geographical location in northern parts. To face the
coming competition, it should start planning to set up manufacturing and
warehousing facilities in other regions of the India otherwise it will pose problem
in supply and logistics system.
CONCLUSION
Fundamental analysis holds that no investment decision should be made without
processing and analyzing all relevant information. Its strength lies in the fact that
the information analyzed is real as opposed to hunches or assumptions. On the
other hand, while fundamental analysis deals with tangible facts, it does tend to
ignore the fact that human beings do not always act rationally. Market prices do
sometimes deviate from fundamentals. Prices rise or fall due to insider trading,
speculation, rumors, and a host of other factors. A dozen experts will arrive at 12
different conclusions. It often happens that a few moments later each would alter
his verdict if given a chance to reconsider because of a changed condition.
This is true to an extent but the strength of fundamental analysis is that an
investment decision is arrived at after analyzing information and making logical
assumptions and deductions. One should buy a share only if its intrinsic value is
higher than its book value. This also protects one against possible loss since one
would dispose of a share whose market value is higher than its intrinsic value.
Hence fundamental analysis supports and encourages safe investing.
Valuation:
At a CMP (Current Market Price on 26th june’2008) of Rs.644.8, the stock is
trading at 38.1x which is at a steep discount to peers like Pantaloon, Provogue,
Shopper’s stop which are trading at 62.29, 102.58, 195 consensus earning
respectively. Considering the 20 yr long industry experience of the management
and good understanding of important markets, focus on tier II and III locations
which are expected to see a major growth in consumption and spending patterns
in the longer term thus giving VRL a distinct first mover advantage and
increasing share of its private label sales, we have a positive bias on the stock.
Vishal has grown at a scorching pace over the last few years. We feel this growth
will continue, going forward. We recommend investors BUY Vishal Retail with a
price target of Rs.644.8.
Happy Investing
LEARNINGS
BOOKS
WEBSITES
www.vishalmegamart.net
www.investopedia.com
www.wikipedia.com
www.nseindia.com