Pantaloon: Restructuring story
Pantaloon is the largest listed retail firm in the country present across consumers’
consumption basket. After years of super normal growth, the company is
streamlining its costs and inventory. At the same time, it will be adding 2.5-3.0
million square feet of retail space across formats. The key catalyst for the stock will
be reduction in inventory in value retail. Between FY10 and FY13, we expect standalone
revenues and adjusted profits to grow by 26.4% and 80.4% respectively.
Restructuring story all the way…
From an aggressive growth play, Pantaloon is now focusing on building an efficient
retail franchise. In the fashion business, the company has streamlined operations,
product assortment and reduced inventory. Already, sell through rates have
increased from 74% to 86%. On the home retail front, the company has localized
sourcing of furniture and is engaging the customer by providing services.
In value retail format, focus is on reducing net working capital which stands at
Rs.1557 psf. For this, company is integrating its 3.5 million square feet of
warehouse space with its retail operations. Already, fill rates have improved from
~70% to ~90%. The company has implemented Warehouse Management System
(WMS), Auto Replenishment System (ARS) and Put to Light (PTL) system.
Well placed to capture consumer spend…
Pantaloon is present across consumers’ consumption basket. In modern retail, in
top 10 cities, it has 10-15% market share in some categories. With pickup in
growth, we expect better throughput in durables, home retail and fashion. This will
improve margins. Given the huge size of India’s middle class, value retail business
will continue to grow.
Private labels
Share of private labels is as high as 75% in Pantaloons. However, private labels
constitute only 25% of sales in value retailing. In value retail, private label gross
margins ~25% compared to 10-12% for branded products. The company has
launched Ektaa portfolio and expects this to be Rs.3000 million in two years.
During FY12 and FY13, we estimate PRIL’s adjusted profits to increase by 31.4%
and 30.2% respectively. This will be achieved by reduction in debt and increase in
gross margins. With consolidation of warehouses, the inventory in the system will
reduce. We initiate coverage with a buy rating on the stock with a target price of
Rs.603. This is based on PE of 24 times FY12 EPS for the parent. We have added
Rs.105 from FVRL based on P/sales of 0.5 for FY12; Rs.29 from future capital
holdings (holding company discount of 25%) and Rs.32 from other investments.
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