ValuePickr Forum

Spencers Retail Undervalued retail story

Spencers Retail is demerged entity from cesc LTD and got listed in Jan 2019 separately. Spencer is trying to position itself as lifestyle retail company and attempting to Increase share of fashion product in it’s sku otherwise currently it is food n Staples based retail company. In financial year ending March 2019 it has sale turnover of around 2200 cr with marginal operating profit n almost zero net profit. It was cash surplus with cash on books of more than 200 cr with net debt zero. In month of July 2019 it has acquired retail business of godrej natural basket at cash consideration of around 300 cr whose balance sheet integration with Spencer is underway. It is expected that it may cause Spencer of around 100 cr debt. Nature basket has turnover of around 335 cr and operating loss of around 60 cr in fy ending March 2019. Most interesting thing is about valuation Spencer is currently valued at market cap of around 540 cr and Enterprise value of close to 700 cr post nature basket acquisition and annual sales turnover in excess of around 2500 cr with zero operating profit. So overall is available at sales to Enterprise value of around 25 perc. Promoters is buyer of stock from open market worth around 50 cr since listing . It is speculated that few month back Amazon was interested to invest in this company at valuation of .8 times sales but promoters themselves wanted to grow the business. It has total store count of around 155 (by adding 35 store count of nature basket store count can cross around 190) with more than 60 lakh customer and annual transaction of around 3.1 cr and average customer spend per transaction of around RS 725. I guess market is concerned about management quality and uncertainty related with acquisition of nature basket which may push profit by few quarters and recent consumption slowdown related stories putting addition selling pressure on stock . Most pure play retail companies is still trading at near to their all time high so valuation for Spencer seem attractive. A company which acquired a company by paying 300 cr in cash is itself available at valuation of 540 cr. Also few month back company appointed former md of Walmart India as CEO to lead the company and chairman Sanjeev Geonka in media interview sounded positive about future outlook of the company . Company has strong presence in states like West Bengal Andhra and eastern up mostly tier 2 cities and acquisition of nature basket give it foot hold in Western market and metro cities like Mumbai Pune Bangalore n Delhi where Spencer has small presence. It is also important to note that Spencer is first retail company which brought concept of hyper Mart in Indian market in 1990 even before future group though management is not able to capitalize on retail opportunity and in 2015 closed around half of it’s loss making retail stores . Due to these kind of historial issues market is not judging this company favorably even though standalone basis company posted operating profit of around 35 cr in quarter ended June 2019.


Disc: I am already invested in this stock at higher level and currently in notional loss from this.

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I agree with all your views. Have you looked at Goenka s privately held business and their long term intent. I understand they also demerged an FMCG type business and also at same time he has privately held FMCG business… certainly not what I would like as an investor. Can you throw some more light on this style of promoter and their long term intent on their recently demerged businesses?
Also, in retail, what is their strategy…like for eg. Dmart strategy is lowest price retailer, trents strength is in private labels, Biyani is trying hard to develop a blanket discount to regular purchasers with strong focus on fashion ( although I am still not clear on his long term intent and any clear Direction) …what is Spencer’s strategy to differentiate itself and grow? Why did it chose to buy nature’s basket , does it fit in its long term strategy except just getting presence in West India with 60cr loss annually? Disclosure: Had a small tracking position which I recently sold at nominal loss. I had found it really cheap and it went on to become cheaper while dmart and trent I had found really costly and they went on to become even costlier. I guess management quality, vision and intent is paramount and Spencer is a big looser in this…

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I agree with the all the views. my only question mark is the promoter. its a big no-no for me. plus spencers is just a normal hypermarket and there no differentiating strategy to my mind. i was in AWE when i entered a d-mart store but did not get the same feeling in a spencers

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There is some reason why it may be cheap. However in India consumer facing business is highly valued and when sentiment improve it may reach it’s fair value which is around .7 times sales. Only issue is high soon it started reporting profit. Godrej is a high class management but still it struggle to scale nature basket or make it profitable. My sense is once a retail company reach turnover of 2000 cr or more it chances of making profit increase and rise in profit is higher than rise in sales as operating leverage kicks in as in India cost of rent and logistics is at higher side. Also Kishore biryani has far worse management still if market give his company high valuation and has never meet market expectation in last 10 years. Even Britannia management wadia is considered third rate for many years before market start giving it high valuation in last 5 years may be. Due to management concern most group company trade at lower valuation however building a business with 3 cr retail transaction is not easy.
My thesis is if 650 cr is given to good management can 3.1 cr customer transaction is possible . Evenn Trent was loss making and selling at lower valuation for many years before market in last 3 years started giving it good valuation . So my sense is that it may happen to Spencer as well as in last 3 years only retail companies is fancied by market. If nothing Spencer can be sold to some big retailer like more of Aditya birla at some higher valuation. All management like to get higher market value for their company.

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There is a spencer walking distance from my home (in gurgaon). Earlier there was SRS at same location which shut down. I went to this Spencer once and for a shopping of more than 5000 Rs I got a princely discount on MRP (what they call savings) of a total of 40 Rs. Never went back again. My Amazon Prime is better value than that any day and delivers right at my doorstep.

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Yes you are correct but still organised retail is hardly 10 perc of total retail sales in India and opportunity size is huge and there is all kind of market and all kind of customers. For Staples buy customers usually prefer nearest store considering traffic situation in Indian cities . I seriously think all discount is marketing gimmics and in reality nobody is offering much discount except on few product to get eyeball. Many retail companies has turned profitable so other can able to adopt profitable business model and also consolidation has happened in last few years .I think now this company is more focussed towards turning profitable n they are trying to develop nich areas in food and gamunet segment and there presentation say they may not be into discounting or pricing game. Tier 2 cities in India now enjoying shopping into these kind of retail chain than traditional kirana shops. Ultimately it boil down to able to show growth and profit if company can achieve it there is no stopping stock price. Now market is in a mood where it don’t have much patience for these kind of turnaround companies but it may change with improved sentiments or else it may fissle out . At 500 cr market cap it may be a value n patience game. Atleast Spencer has business issue or management issue but not fraud situation to warrant such level of undervaluation unless something come out in future that another story. Balance sheet is clean with manageable debt level which is another plus.