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Pantaloon Retail India
Action
With organised retail set to take off in India over the next few years, we believe
PRIL is best placed to benefit from the attractive opportunity in the Indian retail
sector. Through its market leadership across various retail formats, unmatched
scale and strong brand recognition, we believe PRIL is the most attractive way to
invest in the Indian retail story over the medium term. Maintain BUY.
Catalysts
We think PRIL’s ongoing restructuring of its business segments could be a key
near-term catalyst. Reducing its stake in an insurance JV and the opening up of
FDI in the multi-brand retail sector could also boost share-price performance.
Anchor themes
Penetration of organised retail remains low in India, nudging 10%, by our
estimates, and should continue to grow in the medium term. PRIL, in our view, is
very well placed to benefit from such growth.
Well placed to deliver
Strong business momentum
Pantaloon Retail India (PRIL) has consistently delivered a strong
operational performance over the past couple of quarters and we think
that over the medium term it is likely to benefit from the growth of
modern retail. With the food business likely to be PRIL’s focus over
the next few years, we believe that its quarterly performance will
become less volatile.
Food to be focus area
PRIL has identified the food segment as being the group’s focus area.
We expect the food business to contribute some 50% of revenue over
the next couple of years, from 35% now. This should mean
significantly reduced investment in inventory and receivables, which
would be positive from a balance-sheet and cash-flow perspective
over the next few years.
FDI rule changes to be a catalyst
While there has been a lot of market interest in government policy on
opening up FDI in the multi-brand retail sector, no concrete measures
have yet been taken. However, we believe this will change over the
next couple of years as the government recently signalled its intention
to open up FDI in multi-brand retail. This will, we believe, be a key
catalyst for the retail sector in India, which could see operational
expertise as well as financial support come to India.
Valuation attractive
We value the core retail business at 10x EV/EBITDA, on our FY12F
assumptions. This is in line with where PRIL has traded over the past
two years. It has underperformed the Sensex over the past three
month on unrelated negative news flow around corporate debt. We
see this as an opportunity for long-term investors to BUY.
Drilling down
Continuing growth in retail space
PRIL remains committed to increasing its retail space by 2.5-3mn sq ft per year over
the next few years. Since it intends to focus on food, its store sizes may become
smaller and we think there could be significant additional store space under the Food
Bazaar and KB fair-price formats. This should drive sales growth much faster than over
the past few years, we believe.
Trading at a steep discount
We find that PRIL is trading at 16.9x FY12F EPS, which is among the lowest multiples
in the sector. Even the premium/discount to Sensex has come down significantly over
the past few months, and we believe that this is a good opportunity to BUY what we
consider to be the most attractive retail story in India.
Valuation methodology
We value the core business at INR610/share. We value all the subsidiaries and
support businesses at 1x capital employed. The combined value for all the other
businesses stands at INR74/share. After deducting net debt of INR131/share, our price
target comes to INR553.
Risks to our investment view
The retail sector is a leveraged play on the macro fundamentals in the country. Any
downward trend on the macro front presents downside risk to our numbers for PRIL.
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