Vishal Mega Mart – Business Analysis and Outlook.

You are Reading this First Here in Global MediaIndian Inflation has reached a whopping 11.63%. Retailers are swimming through the tide fighting rising prices and rental costs. We analyze the business outlook for value retailer – Vishal Retail running Vishal Mega Mart chain of stores.

Vishal Retail currently is the only retailer focusing entirely on India’s vast and fast growing middle income group with bulk of its stores in Tier-II and Tier-III towns. Vishal Retail has 2.3 mn sft of value retail space, behind Pantaloon Retail Ltd. New space addition is likely to slowdown significantly due to fund constraints and we project the company to have 3 mn sft by FY09 and 5.5 mn by FY11 against managements guidance of a whopping 10 mn sft by FY11. Vishal has a wide geographic reach with presence in 70 towns compared to Big Bazaar’s 54.

Why Private Labels ?
Vishal hardly sells any branded products except few in the FMCG space. Private labels currently account for 15% of its total sales. Management aims to increase this to 25% in the next 1-2 years and 50% in the long term. Hence, the company plans to expand its manufacturing base in apparel and launch more private labels.

Vishal Retail Rentals & Staff Costs:
Vishal’s average rent at Rs31/sq ft/pm is the lowest in the industry. Rent varies widely from Rs15/sq ft/pm in a Tier-IV town to as high as Rs90/sq ft/pm for a store in Delhi Metro. Staff Salary cost per sq ft, too, is significantly lower than peers (Rs320/sq ft vs Pantaloon’s Rs500/sq ft) because Vishal hires untrained staff and puts them on a rigorous 3-4 day training and then move to the shop floor. Sales per sq ft is expected to remain flat at Rs6,381/sq ft over the next 12-18 months.

Same Store Sales Growth:
The company’s product mix is skewed towards apparel (60% of total sales) which fetches higher margins. It will be difficult for SSS growth to recover given the softening economic growth outlook. Catchment competition should still be quite some time away for Vishal given there are no major competitors in this space yet, except Big Bazaar.

Vishal Retail has an over-stretched balance sheet, led by worsening inventory position. Can Vishal swim the high Tide and achieve the targets set forth ?