WalMart in India : A Game Changer
Piyush is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Talk about discounted retail and automatically Wal-Mart (NYSE: WMT) comes to mind. The housing crash dragged down the major economies of the world, along with their retail sectors. The sector needed restructuring and split into high-end and low-end retail segments. Wal-Mart belongs to the category of low-end retailers which retails products required for the daily needs of millions.
Wal-Mart has a market cap in excess of $251 billion, which makes the company as one of the largest businesses around the globe. The company has more than 10,000 retail stores under different names across different 27 nations.
The company is rapidly expanding in the emerging nations Brazil and China. The company also has its presence in India, operating 17 stores under a joint venture with Bharti retail. There is a big growth opportunity for the company, as India recently approved FDI in the retail sector. Thanks to the reform, Wal-Mart can now own up to 51% of stake in the Indian multi brand retail chains, which would obviously operate under the major stakeholder’s name.
Most of the low end retail products in Indian markets involve 6-7 middlemen, starting from the farm produce to the retail stores. These middlemen obviously add their margins, and in the process the prices of primary articles get inflated by 60-80%. Additionally it was also reported that in India, more than 40% of the farm produce rots before it reaches the consumers, and the credit again goes to the long list of middlemen. Wal-Mart would be purchasing primary articles and farm produce directly from the source and would be looking to reduce these middlemen if not make them disappear. This would give the super brand huge gross margins to play with.
Future Group is one of the leading retailers in India, and by far the largest chain of low-end retailer, catering to the daily needs of largest middle class population in the world. It was reported that Wal-Mart is in talks with Future group, to buy a 51% stake in the company. In the second largest populated country, one of the biggest retailers in the world would be working with the country’s largest retail chain. This is a huge positive for the company and analysts believe that Wal-Mart would finally make up for its lost decade.
In addition to its entry in India, Wal-Mart also expects to open around 23 million sq. feet of retail space in the fiscal year 2013. The new retail space would add a significant 2.17% retail space to the existing number which excludes Indian expansions.
In 2011, Wal-Mart announced its $15 billion buyback program. Nearly half of it has been spent and $7.9 billion remains. In the last quarter alone, share worth $3.4 billion were repurchased and by judging at the pace of the buyback, we expect the repurchase to complete by the end of fiscal 2013.
In the recent quarterly results, it was reported that the company’s operating margin fractionally increased from 5.8% to 5.86%. The EPS came in at $1.18 against the expected $1.17 and the management being bullish on the growth prospects of the company increased the EPS guidance for the full year from $4.72 to $4.83. The shares of Wal-Mart yield a healthy 2.13% but what catches the eye is continuous increase in dividend yield since 1974.
Wal-Mart shares its market with Costco Wholesale Corp. (NASDAQ: COST) and Best Buy Inc. (NYSE: BBY).
|
Company |
Net Profit Margin |
ROI |
ROE |
|
Wal-Mart |
3.69% |
13.81% |
23.6% |
|
Costco |
1.73% |
11.43% |
12.86% |
|
Best Buy |
1.6% |
2.28% |
-25% |
Looking at the metrics of the companies, we can see that Wal-Mart leads the pack. If numbers weren’t enough, looking at the companies’ comparative performance in stock returns over the last year should suffice.
Wal-Mart operates in an industry where constant expansion is necessary. The approval for FDI in retail was much awaited in India, and we believe that it would be a huge positive for the company. Wal-Mart also has other mentioned expansion plans along with a share buyback program in action. The numbers look good and Wal-Mart has outperformed its peers in terms of stock returns over the last year. It is due to these reasons that an upsurge in the stock’s price is expected.
PiyushArora has no positions in the stocks mentioned above. The Motley Fool owns shares of Best Buy and Costco Wholesale. Motley Fool newsletter services recommend Costco Wholesale. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.
