Oct 09, 2017 05:14 PM IST | Source: Moneycontrol.com

Buy Shoppers Stop; target of Rs 692: Edelweiss

Edelweiss is bullish on Shoppers Stop has recommended buy rating on the stock with a target price of Rs 692 in its research report dated October 06, 2017.

Edelweiss' research report on Shoppers Stop

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 (an issue due to slow mall development; incrementally negative for Dmart) and HyperCity’s private labels. The company can easily turn HyperCity (likely to be rebranded Big Bazaar NXT) profitable in the first year (‐1.5% EBITDA margin in FY17) itself by enhancing apparel share (~35% gross margin) and pruning headquarter cost. SSL will get INR3,346mn for its 51.09% stake and will use the cash proceeds to pare debt. Also, sharpened focus on core departmental business (strengthened further post recent Amazon deal) is likely to improve EBITDA margin to 8.0% in FY19 (peers’: 8‐10%) from 3.5% in FY17. Maintain ‘BUY’.

Outlook

We believe, 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 INR692 (earlier INR670). At CMP, the stock is trading at 13.0x FY19E EV/EBITDA. We maintain ‘BUY/SO’.

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