Citi:: Pantaloon: Another Quarter – Another Disappointment…But Risks Priced In

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Pantaloon (PART.BO)
Another Quarter – Another Disappointment…But Risks Priced In
 SSS growth trends remain encouraging… — Retail demand continues to be
buoyant as same-store sales (SSS) growth for lifestyle, value and home remained
strong at ~21%, 12% and 18% Y/Y, respectively in 2QFY11. Encouragingly, trends
in the key lifestyle and value businesses were in line with 1Q trends. Overall, core
retail (lifestyle+ value + home) revenues rose a healthy 31% Y/Y (32% in 1Q).

 … however, profit growth disappoints — EBITDA margin contraction of
~150bps Y/Y to ~8.6% for core retail was below expectations. This was on the
back of ~220bps gross margin decline Y/Y, disappointing as mgmt had guided to
an improvement in margins in 2Q on account of the full-price sales in the festive
season. Consequently, core retail PAT rose a modest 6% Y/Y to Rs472m.
 Balance sheet – the Achilles Heel — Parent debt remains elevated at Rs18.3bn
(Rs13.9bn end FY10). Investments in group concerns rose Rs2bn over 1H;
working capital expanded by ~Rs2.6bn. Mgmt noted it ramped inventories ahead
of Jan Republic Day Sales and had higher deposits. We do not build in meaningful
benefits on working capital – given mgmt’s recent lackluster track record.
 E-Zone to be hived off — E-zone would move into a step-down subsidiary, in
which mgmt would induct a strategic partner. E-Zone reportedly had an EBITDA
loss of Rs120m in 2Q – its hive-off should improve profitability in the core Home
Business (which is EBITDA positive). E-Zone will be converted into a digital
commerce platform.
 Maintain Buy; TP Rs338 — Downside risks are largely priced in – we maintain
Buy, even as we cut our core retail PAT est. by 28-41% over FY11-13E, tweaking
our parent revenues/margins in line with the recent trends and increased interest
expense assumptions. Our TP is revised to Rs338, valuing core retail at Rs307
(from Rs486), on 25x June12E EPS. Value ascribed to other parts (FCH, Future
G enerali & Future Supply Chain) is revised downwards to Rs31 (Rs44 earlier).


Our valuation methodology remains the same across businesses.
 We value the core retail business at ~Rs307/ share (Rs134 for Lifestyle +
Home and Rs172 for Future Value). Our target multiple is unchanged – at
25x – as we roll forward to June12E (from Mar12E) EPS. We maintain our
target multiple at 25x at a 40% premium to regional peers. We think this is
justified given PRIL's superior growth profile, dominant positioning in India
and scarcity premium.
 Future Capital is valued at Rs20/share (based on the current market value).
A 20% holding company discount has been ascribed to Future Capital. We
have revised this value downwards by ~38%.
 We add ~Rs12/share valuing other main subsidiaries Future Generali and
Future Supply Chain Solutions at PRIL’s investment value.


We pare our profit estimates for core retail by 28-41% over FY11-13E; primarily
as we tweak our parent business revenues/margin assumptions and increase
capital costs – in line with the recent trends.