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Pantaloon
Profit growth takes a breather; Maintain Buy
„Dec Q profit Rs473mn, up 6% yoy; Reiterate Buy
We were disappointed by significantly weaker than expected margins but were
encouraged by the strong sales growth as Same Store Sales growth (SSSG)
remained healthy across all categories. Longer term gross margin outlook now
appears much weaker as contribution from lower margins Foods is rising and
gestation for loss making Home Retail could run longer. We cut our est for FY11-
13E by ¬35% to factor in lower gross margins but still maintain Buy on expected
EPS CAGR of 50%. PO cut to Rs530 on lower DCF valuation for Core Retail biz.
Topline growth remains strong on encouraging SSSG
Pantaloon recorded 32% yoy growth in sales largely in line with our est. Area
addition also picked up to 0.8mn. This gives us confidence of achieving 2mn area
addition target this year. SSS growth remains strong at 12% for Value, 21% in
Lifestyle and 18% in Home. This trend is encouraging as it reinforces our view
that Pantaloon is set to benefit from upswing in urban discretionary spending.
Margin declines on weaker mix and losses in Electronics
Gross margin fell 150bp during the quarter vs our est of 80bp on 1) weaker mix 2)
deeper discounts and 3) much higher losses in electronics. We have structurally
cut gross margin by 100-200bp as we now build higher contribution from lower
margin Foods category and much longer gestation phase for Home Retail given
issues being faced by the electronics segment.
Valuations appear attractive for fundamental growth story
We believe valuation is attractive as at 19xFY12E EPS, the stock is trading at a
discount of 20% to the sector for a higher earnings growth trajectory led by
improving consumer spending, improvement in profitability driven by backend
efficiencies and organizational restructuring and continued deleveraging.
Price objective basis & risk
Pantaloon (PFIAF)
Our PO of Rs530 is based on a SOTP valuation comprising stand-alone retail at
Rs483, the Future Capital stake at Rs24 and the stake in Future Generali at
Rs23. Retail is based on DCF using a WACC of 11.1pct, a steady-state EBITDA
margin of 9pct from FY15E onwards and a terminal growth rate of 5pct. Future
Capital is based on a 20pct discount to its market price. Future Generali stake is
valued 12xFY12E NBAP.
Downside risks: Stiffer competition, slow down in consumer spending and store
cannibalization in retail.
Upside risks: Stronger-than-expected consumer demand.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Pantaloon
Profit growth takes a breather; Maintain Buy
„Dec Q profit Rs473mn, up 6% yoy; Reiterate Buy
We were disappointed by significantly weaker than expected margins but were
encouraged by the strong sales growth as Same Store Sales growth (SSSG)
remained healthy across all categories. Longer term gross margin outlook now
appears much weaker as contribution from lower margins Foods is rising and
gestation for loss making Home Retail could run longer. We cut our est for FY11-
13E by ¬35% to factor in lower gross margins but still maintain Buy on expected
EPS CAGR of 50%. PO cut to Rs530 on lower DCF valuation for Core Retail biz.
Topline growth remains strong on encouraging SSSG
Pantaloon recorded 32% yoy growth in sales largely in line with our est. Area
addition also picked up to 0.8mn. This gives us confidence of achieving 2mn area
addition target this year. SSS growth remains strong at 12% for Value, 21% in
Lifestyle and 18% in Home. This trend is encouraging as it reinforces our view
that Pantaloon is set to benefit from upswing in urban discretionary spending.
Margin declines on weaker mix and losses in Electronics
Gross margin fell 150bp during the quarter vs our est of 80bp on 1) weaker mix 2)
deeper discounts and 3) much higher losses in electronics. We have structurally
cut gross margin by 100-200bp as we now build higher contribution from lower
margin Foods category and much longer gestation phase for Home Retail given
issues being faced by the electronics segment.
Valuations appear attractive for fundamental growth story
We believe valuation is attractive as at 19xFY12E EPS, the stock is trading at a
discount of 20% to the sector for a higher earnings growth trajectory led by
improving consumer spending, improvement in profitability driven by backend
efficiencies and organizational restructuring and continued deleveraging.
Price objective basis & risk
Pantaloon (PFIAF)
Our PO of Rs530 is based on a SOTP valuation comprising stand-alone retail at
Rs483, the Future Capital stake at Rs24 and the stake in Future Generali at
Rs23. Retail is based on DCF using a WACC of 11.1pct, a steady-state EBITDA
margin of 9pct from FY15E onwards and a terminal growth rate of 5pct. Future
Capital is based on a 20pct discount to its market price. Future Generali stake is
valued 12xFY12E NBAP.
Downside risks: Stiffer competition, slow down in consumer spending and store
cannibalization in retail.
Upside risks: Stronger-than-expected consumer demand.
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