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Can Tesco PLC Keep Growing?

One of the biggest criticisms of Tesco’s (LSE: TSCO) (NASDAQOTH: TSCDY.US) recent leadership is that the grocer took its eye of the ball in the domestic market. While pursuing growth and expansion abroad, market share on its home turf declined, and it issued a shock profit warning in January 2012.

Tesco is now in a weaker position than at that time, so you might find it surprising that the company just announced plans to enter the Indian grocery market.

The FTSE 100 blue-chip has agreed a joint venture agreement with a subsidiary of India’s Tata Group for £90m. Tesco becomes the first foreign grocer to enter the country’s £300bn retail sector.

What went wrong before?

Tesco offloaded its loss making US venture Fresh & Easy last September at a total cost of £2bn. The chief executive of the struggling operation is no longer with Tesco, claiming shortly after that he wished he’d been given more time.

TescoFar from being content with simply being a highly successful UK retailer, the goal was to become a global player — in concert with ex-boss Terry Leahy’s vision. No British retailer seeking growth in America — J Sainsbury, Marks and Spencer, Dixons — has succeeded. Tesco would not be the first.

True, the timing was bad — the launch coincided with the sub-prime mortgage scandal, and subsequent recession — but the persistence in not cutting losses sooner aggrieved investors.

Why India could be lucrative

The US is the biggest retail market in the world, and it was an expensive nut to fail to crack. India, on the other hand, is more of a long-term play: by 2027 India is expected to have the world’s largest middle class population. 

Emerging market stocks aren’t in vogue at present, however. In January, rising concerns about economic and political risk led to the worst emerging market sell-off since 2001. And it’s true, funds specialising in some of the  most popular emerging markets, like Brazil, Russia and India, have lost on average between 15% to 30% in the last year.

But Tesco’s £90m expense to enter India seems perfectly measured. It will likely be many years before the joint venture has any material impact on sales, but longer term could be prove immensely lucrative. It seems a small price to pay for exposure to a rapidly growing economy. 

Would I buy Tesco?

So, might now be a good time to buy Tesco? At 294p, the shares are trading on a forward P/E of 10, which to me looks cheap. With a dominant market position, and a price-war looming, Tesco is well placed to rough-up its rivals this year. Unlike rival Sainsbury’s, Tesco has the profit margins — 5.2% — to sharply cut prices and drive the most sales.

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Mark does not own shares in Tesco. The Motley Fool owns shares in Tesco.