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UBS Investment Research
Pantaloon Retail (India) Ltd.
Concerns overdone
Good entry point at current levels
PRIL has declined ~29% and 31% in absolute and relative terms in last three
months. The underperformance is mainly due to its name being involved in the
loan scam together with general nervousness across market towards higher risk
stocks. The stock is trading at 1.9x PB FY12E vs. historical average of c4x. We
believe it’s a particularly attractive entry point for investors favouring high beta
stocks.
Growth drivers in place
We continue to like the stock due to 1) its attractive store locations, 2) well
established logistics and increasing integration with backend and 3) strong brand
equity. The biggest catalyst for the stock would be potential opening up of multi
brand retail to FDI, which would give Pantaloon the opportunity to unlock value in
its "value retail business" by divestment or partnership with a foreign company.
The stock offers 21% forecast excess return on our bear case valuation of Rs470
where we assume SSG of 6-8% in FY12 (vs. our base case assumption of 8-10%)
and increase of cost of debt to 8.8% from our base case assumption of 8.1%. We
believe the stock offers attractive risk reward at PB of 1.9x FY12E.
Valuation: Maintain Buy and PT of Rs600
We value PRIL’s core retail business using a DCF methodology, assuming a
WACC of 11%, medium-term growth of 12.0%, and terminal growth of 4.5%. We
value PRIL’s holding in FCH at Rs35/share, based on its market value. We value
Future Generali Insurance at Rs23/share.
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