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'We have rationalised costs and fine-tuned our depreciation model'

Shopper’s Stop reported a significantly higher profit during the second quarter. Govind Shrikhande, president & CEO, explains to Pallabika Ganguly how he did it.

Pallabika Ganguly (ML): Shopper's Stop reported healthy numbers for the second quarter. Do you think the good show will continue in the next quarter as well?
Govind Shrikhande (GS): In the retail sector, the third quarter is always the best quarter because of the festivals, new-year celebrations and commencement of the marriage season which lasts till May-June next year. Last year, sales were affected following the terror attack on Mumbai. The slowdown continued till March this year. But the business environment has changed since then and I don’t see any problem in repeating our second-quarter performance. There are three key reasons for the improvement: first, the overall climate is definitely improving, as we can see from the revival across several industries, and consumer confidence is high; second, the European and US economies are showing signs of recovery; and third, Shopper’s Stop is a good brand and we have upgraded our merchandise and also launched many new brands. With an increasing, loyal customer base of around 14 lakh, I feel we will be able to do well in the coming quarters.

ML: How have you managed to cut operating expenses?
GS:
During the first and second quarters, we were able to cut our operating costs by around 600 basis points. We achieved this through multiple measures. We reduced our employment cost by 15% to 18%, including a 15% salary cut of top management. We reduced our electricity consumption by 14%. We are also shifting to Tata Power from Reliance Infrastructure, which would help up to reduce our electricity cost. We have also cut down on advertising. Last year, we had to spend around Rs14 crore on our logo change, but this year, this cost was not there. Besides, we have also cut down our usage of office space by 15%.

ML: During the second quarter, Shopper’s Stop reported operating margins (OPM) of 7%, while there are several retailers across the country operating on a very thin margin. Will it improve?
GS:
Instead of OPM, we prefer to use EBITDA (earnings before interest, taxes, depreciation, and amortization) to measure performance. Over the next 18 months, we should be able to achieve an EBITDA of 8.5%. When we talk about the margins of retailers across the country, we need to look at three relatively big segments: the hypermarkets & supermarkets where OPMs are below 20%, departmental stores where OPMs are 30%-35% and the electronics segment where OPMs are less than 10%.

ML: During the second quarter, your net profit rose 200% to Rs12.1 crore. What are the factors responsible for this growth?
GS:
We worked on our depreciation policy, which gave us a swing of 500 basis points, while saving on operating costs and increasing cash margins. Earlier, we used to renovate our stores every three years. But after some research and analysis, we found that there is no need to renovate every store every three years—we can do it over a period of five to seven years. With an EBITDA of less than 5%, depreciation of 4% and interest cost of 1.5%, our overall net profit was impacted. Our auditors and board members then reviewed our depreciation policy and found that we were actually over-depreciating our entire assets. We realised that the competition was using a completely different method of depreciation and our depreciation rates were nearly two-and-a-half times higher. So, we revisited the whole policy and decided to apply depreciation rates as per the category. For example, computer and IT infrastructure gets outdated over a three-to-four-year period, so we adjusted our depreciation rate accordingly. We increased the depreciation period to seven years for furniture and to 12 years for ceiling & flooring. Earlier, we used to bundle everything into a three-to-five-year depreciation cycle.  

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China faces massive steel oversupply; global prices likely to be affected

China’s steel trade body fears a rapidly worsening situation in the December quarter and early 2010

While Indian steel stocks are rallying, China Iron and Steel Association (CISA) has warned that oversupply is the major problem that the Chinese steel sector would need to confront. The trade body expects the situation to worsen in the fourth quarter and in early 2010. Steel is a globally-traded commodity and overcapacity in China is bound to lead to lower global prices and pressure on Indian steel companies.

According to CISA statistics, the steel inventories of 26 large and medium-sized cities totalled 11.13 million tonnes (MT) at September 2009, up 5.3MT or 90.9% from the beginning of this year. Further, the 68 large- and medium-sized steel enterprises’ steel and billet steel inventories totalled 11.55MT at September’s closing, up 1.44MT or 14.26% from the beginning of the year. Of the 70 large- and medium-sized steel enterprises, 10 suffered losses in the first nine months as compared to seven in the same period last year. China’s crude steel output was 420.40MT, up 7.5% year-on-year over the first nine months of this year, up 29.37MT. China’s current steel capacity is around 600MT per year, with around another 58MT per year under construction.

Meanwhile, the entire year’s output is estimated at 550MT, up 50MT or 10% from 2008. In the first nine months of this year China imported 1.37MT of crude steel as compared with the 39.47MT of net exports in the same period last year.

As total net crude steel exports reached 47.63MT for the entire 2008, some 47MT will be shifted from the international market to the domestic market. China’s apparent steel demand rose 20% year-on-year in the first nine months, to 421.8MT, mainly driven by the government’s expansion of fixed asset investment, and the growth is predicted to sustain into the fourth quarter and early next year.

China has also imported 1.005MT of stainless steel in the first nine months, up by 4.3% year-on-year and exported 4,76,800 tonnes, down by 45.5% year-on-year. During January 2009 to September 2009 the Chinese stainless steel output was 6.569MT, up by 37.5% year-on-year.

As per reports, the output growth of crude steel and the change in imports and exports would bring the supply of crude steel in the Chinese market at 20% above last year’s figures. In October 2009 alone, Chinese crude steel production growth has sharply grown by 42% year-on-year to 51.75MT.

-Swapnil Suvarna [email protected]
 

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