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Pantaloon Retail (India) Ltd
Overweight; PART.BO, PF IN
Taking it all in stock
• Disappointing Q2 earnings performance. While sales growth trends
remain encouraging, subdued margins and higher capital costs led to
weak earnings performance for PRIL during Q2FY11. Higher RM costs,
losses for electronics retailing business, increased working capital
requirements (attributed to higher inventories ahead of Jan Republic Day
sales and higher deposits) and elevated debt levels were a drag on
profitability during Q2.
• Expect EBITDA growth rates to pick up in coming quarters driven by
sustained healthy SSS growth trends, better profitability for home
retailing (supported by restructuring of electronics retailing) and fashion
business (driven by price hikes to be initiated for private label apparel
portfolio).
• Working capital improvement and monetization of non-retail
investments would be key drivers for stock re-rating. Management has
guided towards an improvement in working capital efficiency and
monetization of non-core operations over the next 12-18 months. Our
numbers do not build in any improvement in working capital for FY11
and management delivering on these parameters will be an upside risk to
our numbers.
• Risks priced in; Maintain OW. We pare earnings estimates for FY11-
12E by c15% as we moderate our margin assumptions (by 20bp for core
retail) and raise interest costs by 9-15%. Our sum-of-parts based Dec'11
TP is revised to Rs335 (from Rs465 earlier) with core retail operations
valued at Rs318 and stake in Future Capital Holdings valued at
Rs17/share (earlier Rs21/share).
• Key risks to our earnings and PT are 1) Higher-than-anticipated
deterioration in product mix and working capital, 2) Weakness in
consumer demand, 3) Any investments that are earnings dilutive, and 4)
Significant increase in investments in non-retail operations.
Management Call Takeaways
Encouraging sales growth trends. Management noted that SSS growth trends
remain fairly healthy across segments with recent January Republic Day sales
witnessing good consumer response and sales in Jan month amounting to Rs12bn.
During Q2FY11 value, lifestyle and home retailing reporting 11.5%, 20.9% and
18.3% SSS growth respectively.
Space addition on track. PRIL added 0.8mn sq ft during Q2FY11 taking overall
space addition during 1HFY11 to close to 1mn sq ft. Management expects to add
another 1.6mn sq ft over 2HFY11 to meet its target of c2.5mn sq ft of annual
addition. They further expect to add similar space in FY12.
Hiving off E-Zone. Weak margins for E-Zone format (electronics retail) has been a
key drag on overall margins for PRIL. Management is now looking to hive E-Zone
into a step down subsidiary to facilitate induction of strategic partner, moderate
investments in front end retail stores and convert it to digital platform to improve
profitability. They are targeting to convert 10% of physical sales business as digital
over next 5 years.
Higher RM costs weigh on margins. Inflationary pressures (in case of apparel and
staples) impacted gross margins (-220bp y/y during Q2FY11). PRIL is looking to
initiate c18% price increases for its private label apparel business which should help
mitigate margin pressures to some extent.
Debt increase in 2H should be limited. Core retail gross debt stood at Rs35bn as of
Dec’10 rising from rs30bn as of June’10 end. The increase was on account of
Rs4.5bn of capex and Rs6bn increase in working capital (due to stock up of
inventories for Jan Republic Day sales, upcoming World cup and higher deposits).
Management noted that incremental working capital requirements in 2H will be
limited and company guided to inventory days to reduce from 98 days currently to 90
days. Net debt/Equity for core retail stood at 1.06 as of Dec'10 end. Management
noted that 75% of PRIL’s debt is on fixed rate basis with an average tenure of 3.5
years which would make the company less susceptible to interest rate hikes.
Monetisation of non-core retail investments likely over 12-18 months. PRIL has
invested Rs800m in 1HFY11 into Future Ventures. Management stated that there
would be no further investments in FY11 other than the Rs500m/quarter investment
in insurance. There has not been much progress on PRIL's plans to divest its
investments in financial services and other non-core businesses so far and
management expects some monetization over next 12-18 months. This uncertainty
has further delayed PRIL's plans to de-leverage its balance sheet.
Earnings revision
We build in marginally lower operating margins (by 20bp) for FY11/12E for core
retail on account of weaker gross margins. We have also raised interest cost estimates
by 9-15% for FY11/12E driven by a) higher debt levels as free cash flows are
constrained on account of higher working capital estimates and higher investments in
insurance business, and b) higher interest rates. Depreciation charges are also raised
in line with recent trends. As a result our earnings estimates for FY11 and FY12 are
revised down by c15%.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Pantaloon Retail (India) Ltd
Overweight; PART.BO, PF IN
Taking it all in stock
• Disappointing Q2 earnings performance. While sales growth trends
remain encouraging, subdued margins and higher capital costs led to
weak earnings performance for PRIL during Q2FY11. Higher RM costs,
losses for electronics retailing business, increased working capital
requirements (attributed to higher inventories ahead of Jan Republic Day
sales and higher deposits) and elevated debt levels were a drag on
profitability during Q2.
• Expect EBITDA growth rates to pick up in coming quarters driven by
sustained healthy SSS growth trends, better profitability for home
retailing (supported by restructuring of electronics retailing) and fashion
business (driven by price hikes to be initiated for private label apparel
portfolio).
• Working capital improvement and monetization of non-retail
investments would be key drivers for stock re-rating. Management has
guided towards an improvement in working capital efficiency and
monetization of non-core operations over the next 12-18 months. Our
numbers do not build in any improvement in working capital for FY11
and management delivering on these parameters will be an upside risk to
our numbers.
• Risks priced in; Maintain OW. We pare earnings estimates for FY11-
12E by c15% as we moderate our margin assumptions (by 20bp for core
retail) and raise interest costs by 9-15%. Our sum-of-parts based Dec'11
TP is revised to Rs335 (from Rs465 earlier) with core retail operations
valued at Rs318 and stake in Future Capital Holdings valued at
Rs17/share (earlier Rs21/share).
• Key risks to our earnings and PT are 1) Higher-than-anticipated
deterioration in product mix and working capital, 2) Weakness in
consumer demand, 3) Any investments that are earnings dilutive, and 4)
Significant increase in investments in non-retail operations.
Management Call Takeaways
Encouraging sales growth trends. Management noted that SSS growth trends
remain fairly healthy across segments with recent January Republic Day sales
witnessing good consumer response and sales in Jan month amounting to Rs12bn.
During Q2FY11 value, lifestyle and home retailing reporting 11.5%, 20.9% and
18.3% SSS growth respectively.
Space addition on track. PRIL added 0.8mn sq ft during Q2FY11 taking overall
space addition during 1HFY11 to close to 1mn sq ft. Management expects to add
another 1.6mn sq ft over 2HFY11 to meet its target of c2.5mn sq ft of annual
addition. They further expect to add similar space in FY12.
Hiving off E-Zone. Weak margins for E-Zone format (electronics retail) has been a
key drag on overall margins for PRIL. Management is now looking to hive E-Zone
into a step down subsidiary to facilitate induction of strategic partner, moderate
investments in front end retail stores and convert it to digital platform to improve
profitability. They are targeting to convert 10% of physical sales business as digital
over next 5 years.
Higher RM costs weigh on margins. Inflationary pressures (in case of apparel and
staples) impacted gross margins (-220bp y/y during Q2FY11). PRIL is looking to
initiate c18% price increases for its private label apparel business which should help
mitigate margin pressures to some extent.
Debt increase in 2H should be limited. Core retail gross debt stood at Rs35bn as of
Dec’10 rising from rs30bn as of June’10 end. The increase was on account of
Rs4.5bn of capex and Rs6bn increase in working capital (due to stock up of
inventories for Jan Republic Day sales, upcoming World cup and higher deposits).
Management noted that incremental working capital requirements in 2H will be
limited and company guided to inventory days to reduce from 98 days currently to 90
days. Net debt/Equity for core retail stood at 1.06 as of Dec'10 end. Management
noted that 75% of PRIL’s debt is on fixed rate basis with an average tenure of 3.5
years which would make the company less susceptible to interest rate hikes.
Monetisation of non-core retail investments likely over 12-18 months. PRIL has
invested Rs800m in 1HFY11 into Future Ventures. Management stated that there
would be no further investments in FY11 other than the Rs500m/quarter investment
in insurance. There has not been much progress on PRIL's plans to divest its
investments in financial services and other non-core businesses so far and
management expects some monetization over next 12-18 months. This uncertainty
has further delayed PRIL's plans to de-leverage its balance sheet.
Earnings revision
We build in marginally lower operating margins (by 20bp) for FY11/12E for core
retail on account of weaker gross margins. We have also raised interest cost estimates
by 9-15% for FY11/12E driven by a) higher debt levels as free cash flows are
constrained on account of higher working capital estimates and higher investments in
insurance business, and b) higher interest rates. Depreciation charges are also raised
in line with recent trends. As a result our earnings estimates for FY11 and FY12 are
revised down by c15%.
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