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Pantaloon Retail (India) Limited
Making the right moves
Investment rationale
Revenue growth to be aided by same store growth and space expansion
According to the management, the growth in revenues would be driven equally
by same store sales and expansion of retailing space. According to our
estimates, the retail space would grow by1.6m square feet during FY11 and
1.8m square feet per annum during FY12 and FY13. We expect sales to
grow by 23% CAGR during FY10-13e.
Reduction in inventory to reduce working capital and aid cash flows
Pantaloon's key focus and the game changer going ahead would be the
management of inventory. The company is focusing on reducing its inventory
requirement by primarily focusing on increasing the inventory turns through
increase in contribution of foods and improvement in inventory turns of fashion.
Increase of Private label in foods to aid profitability
Pantaloon is working towards increasing its private label contribution in foods
to 20% from 7% in the next 3-4 years. We estimate that the average differential
gross margins in foods between private label and branded is nearly 500-
700bps.
Valuation and outlook
At the CMP of INR360, the stock is trading at a PE of 32.5x FY11e and at
23.8x FY12e.
With the ongoing re-structuring initiative primarily aimed towards focusing
on core retail operations, we think that the company is back in business. We
believe that the stock would trade at a one-year forward PE of 20x, implying
FY12e value per share of INR450 for the core retail operations. Further, its
stake in future capital holdings would fetch a value per share of INR23, after
factoring in a holding company discount of 20%. Therefore, we arrive at a
target price of INR473 in a time span of 12-18 months.
Investment rationale
Revenue growth to be aided equally by same store growth and space expansion
Pantaloon’s management is targeting a space addition of 2-2.5m square feet per annum
during the next three years. Further, it targets to grow revenues at 25-30% CAGR during
the next three years. According to the management, the growth in revenues would be
driven equally by same store sales and expansion of retailing space. Therefore the
management has been indicating at a 12-15% growth in retailing space and a 12-15%
same store growth. According to our estimates, the retail space would grow by1.6m
square feet per annum during FY11e, while during FY12e and FY13e retail space
would grow by 1.8m square feet. We expect sales to grow by 23% CAGR during
FY10-13e. We estimate a same store growth of 10% in value retailing while same store
growth in lifestyle retailing and value retailing will be to the tune of 12% and 15%
respectively. During FY11, the company has added about 0.4mn square feet in 1QFY11
and plans to add another 0.3-0.4m square feet of retailing space during 2QFY11. For
the full year FY11, the company plans to add close to 1.8-2.0m square feet.
Reduction in inventory to reduce working capital and aid cash flows
Pantaloon's key focus and the game changer for the company going ahead would be
inventory management. It is focusing on reducing its inventory requirement by focusing
on increasing the inventory turns. The company targets to reduce its inventory
outstanding days by about 30% during the next 2-3 years. This strategy in turn would
lead to lower working capital requirement as inventory forms about 60% of Pantaloon's
current assets. This would be primarily through increase in the contribution from foods
and the increase in inventory turnover or reduction in inventory outstanding days of
fashion. Pantaloon plans to increase the contribution of foods from 33-35% of total
sales to 40-45% of sales in the next 3-4 years. The international standard for food's
contribution to retail sales stands at 60%. However with the expansions happening on
a consistent basis, the company at best would increase it to 40-45%. According to
our estimates, foods has a high inventory turnover of about 8-10x which would in turn
would lead to lower inventory outstanding days. The reduction in inventory foods
would be through higher focus on fresh fruits and vegetables, which structurally have
a higher inventory turnover. Further the company wants to improve the inventory turnover
in fashion. Big retailers like Zara have inventory turnover of about 7-8x.
Increase of Private label in foods to aid profitability
Pantaloon is working towards increasing the private label contribution in foods to 20%
from 7% in the next 3-4yrs. We estimate that the average differential gross margins in
foods between private label and branded is to the tune of about 500-700bps. Therefore
the increase in contribution of foods from 33-35% to 40-45% coupled with the
improvement in profitability of the category aided by higher contribution of private
labels, would lead to higher profitability for the core retail operations.
Home Town gaining traction with changing lifestyle
With the improvement in lifestyle and growing awareness of aesthetics, Home Town
and the overall home solution business is gaining traction and is expected to witness
accelerated sales growth in the coming years. We expect Home solutions to break
even by FY12e with strong growth in sales of home town.
Hiving off of financial services and insurance would free up cash
Pantaloon plans to hive off its financial services (FCH) and insurance business and
merge it in to a separate company. This would lead to an increased focus on its retail
business apart from freeing-up funds for the core operations as the insurance business
attracts entails an annual investment of ~INR0.8-1bn. According to the company,
restructuring is expected to happen over a period of 12-18 months. Currently, it is
facing regulatory hurdles for hiving off its insurance business and merging it with FCH
as the former business is governed by IRDA while FCH is an NBFC governed by RBI.
Pantaloon will first hive off its financial services venture and will follow it up by demerging
its insurance venture.
FDI in multi-brand would be an added advantage
The DIPP has floated discussion papers to liberalize FDI policy in retail. While the
process of consulting the retailing companies is over, the government is yet to take a
formal call on the issue. Indian retailers, expect that there is a high probability of FDI
in multi-brand to happen in a phased manner going ahead. In the initial phase, the
FDI could be capped at 24-25% and gradually could be increased over the years.
However, we understand the government is facing strong resistance from the states on
the issue and uncertainty looms large over the sector. In a scenario of allowance of
FDI in multi-brand retail, it would be a bigger positive for Pantaloon as it has been in
talks with the French retailer, Carrefour for a while. On account of uncertainty, Pantaloon
is now planning to enter in to a franchisee agreement with the global retailer.
Core business to post a CAGR of 23% in revenues and 47% in PAT during FY10-13e
Pantaloon's Core retail is expected to grow by 23% CAGR to INR165bn during FY10-
13e. We expect EBITDA to grow by 22% CAGR during the period, however higher
sales coupled with higher inventory turns and lower working capital requirement would
lead to lower interest outgo and hence higher profit after tax. We expect profit after
tax for the core retail to grow by 47% to INR5.3bn during FY10-13e.
Valuation and outlook
At CMP of INR360, the stock is trading at a PE of 32.5x FY11e and at 23.8x FY12e.
The stock has been consistently de-rated due to the concerns of free cash flow generation
and de-focus on core business, retail. However, with the ongoing re-structuring initiative,
we believe that the company is back in business. We expect the company to be the
biggest beneficiary of the changing demographics and the strong growth expected in
the organised retail sector due to its wide spread retail network and comprehensive
portfolio of formats.
We therefore believe that the stock would trade at a PE of 20x, FY13e earnings,
providing value per share of INR450 for the core retail operations. Further, its stake in
future capital holdings would fetch a value per share of INR23, after factoring in a
holding company discount of 20%. Therefore, we arrive at a target price of INR473
for the company in a time span of 12-18 months.
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