Dalal Street

Just a while ago, Merill Lynch has put a SELL recommendation on Retailing Stocks – Pantaloon Retail India Ltd and Shoppers Stop. Both the stocks have a potential downside of 20% from current levels. In the near term, Merill expects cost pressures to rise materially, which should slow EPS growth from 50% plus over the past three years to about 30% over the next two years.

SELL Pantaloon Retail India:
Merill expects Pantaloon’s EPS growth to slow to 36% in FY08 to Rs9.5 and 25% in FY09 to Rs11.9. There is downside risk due to cost pressures and imminent inventory write-off. Excluding the AMC value of Rs38/sh, Merill estimate the pure retail business is trading at P/E of 41x FY08E and 33x FY09E. Merill believes valuations are high given that Pantaloon has a low ROE of about 11%, does not generate cash from operations and is unlikely to do so in the near future.

SELL Shoppers Stop:
Shoppers Stop EPS growth wil also slow to 31% in FY08 to Rs13.7 and 29% in FY09 to Rs17.6. At P/Es of 44x FY08E and 34x FY09E, valuation is steep. Its option to buy a 51% stake in group company HyperCity is a good move, but is unlikely to be a re-rating trigger. It could, in fact, be marginally EPS dilutive in FY09.

Citigroup Research has recommended a BUY/Medium Risk on Gateway Distriparks with a price target of Rs 216, 33% upside from current levels.

GATE [through its subsidiary (GatewayRail)] and Concor are to form a 51-49 JV, which replaces the prior restrictive agreement between Concor and GATE that prohibited the latter from running its own trains until Oct/Nov08. Total outlay envisaged is Rs700m, albeit phase 1 capex will be around Rs210m (which GATE and Concor will fund through equity infusions). Also GATE’s current business at the Garhi ICD will be transferred to the JV. GATE will earn lease rentals (as yet undecided) for use of its ICD.

Citi expects margins at GATE’s JNPT facility to remain depressed over the next 6 months due to increased competition. This remains an area of concern. However, we are satisfied with the trajectory of the train operations, and believe that GATE is taking the right steps to develop an integrated logistics business model.

Citi expects an EPS of Rs11.32 and Rs 13.68 for FY08 and FY09, a 21% YoY growth.

Citigroup Research and ETrade owned IL&FS Investmart are bullish on the prospects of Godrej Consumer Products Ltd [GCPL].

GCPL’s 50:50 JV with SCA Hygiene Products, a Swedish consumer and paper goods company, will produce and market baby care and feminine hygiene products in India, Nepal and Bhutan. This development is particularly significant because, SCA group, which has a presence in 90 countries, is a market leader in the global absorbent incontinence products market and has 26% market share. This venture will give GCPL an entry into Rs 8 Billion Indian feminine hygiene market which is also growing at the rate of 12% YoY.

GCPL launched a new soap ‘Vigil,’ which has been priced competitively at Rs11 for a 75gm pack. Priced slightly above ‘Godrej No 1’ within GCPL’s stable, this brand would enable GCPL to participate in the high growth health soap market.

Godrej is expected to report an EPS of Rs 7.75 for FY08 and Rs 8.77 for FY09. Citi has a Low Risk BUY on Godrej Consumer Products Ltd with a Target Price of Rs 195, 31% upside from current levels.

Gokaldas Exports Ltd (GEL), India’s largest garment exporter, has drawn up an extensive roadmap for growth. It is expanding capacity by setting up three new factories and diversifying its client and product mix. Big global retailers are consolidating their vendor base and the company will be optimally positioned to capitalize on the opportunity with its expanded capacities.

ICICI predicts Gokaldas Exporst to report FY08E EPS of Rs 24.99 and FY09E EPS of Rs 31.46 . ICICI values the stock at 10x its FY09E EPS of Rs 31.46, setting a 12-15 month price target of Rs 315, upside of 33% from current levels. Gokaldas Research Report is available here.