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UBS Investment Research
Pantaloon Retail (India) Ltd.
Valuations at trough multiples, fundamentals intact
Revenues in line; product mix and leverage hurt profits
Pantaloon Retail’s (PRIL) Q2 FY11 revenues were at Rs27.6bn (+31% YoY).
Same-store-sales growth (SSSG) for value, lifestyle and home retailing was 11.5%,
21%, and 18.3%. EBITDA grew 11% YoY to Rs2.4bn. Higher interest costs
affected PBT, which grew 4% YoY to Rs708m, and PAT which rose 5% YoY to
Rs472m (UBS-e Rs615m).
Concerns warranted but built into stock price
There is an overhang on PRIL’s complicated holding structure and highly levered
balance sheet. PRIL has high working capital requirements as well. We lower our
EPS estimates from Rs12.05/16.17/23.23 to Rs9.22/14.38/20.25 for FY11/12/13.
PRIL’s stock price has corrected 50% from its peak in October 2010, which has
built in these concerns.
Fundamentals intact
With India among the most attractive retail destinations, PRIL being the largest
retailer is in a sweet spot. We believe PRIL will continue store expansion at a
lower pace, and shift focus to cash generation and optimal capital deployment.
PRIL’s stock price decline is an attractive buying opportunity, in our view.
Valuation: lower price target from Rs500 to Rs350; maintain Buy
We change our valuation methodology from sum-of-the-parts (SOTP) to DCF,
where we explicitly forecast long-term valuation drivers using UBS’s VCAM tool.
We assume a WACC of 12% and a terminal year growth rate of 5%.
Earnings concerns priced in
PRIL is a high beta stock and in the current uncertain environment, the stock has
taken more of a hit than the broader market (see Chart 1). We lower our price
target to Rs350 to incorporate:
Reduced earnings estimates due to higher material costs, worsening
product mix, higher interest and tax costs. We lower our EPS estimates by
29%/18%/19% for FY11/12/13;
The change in valuation methodology to DCF (from SOTP) where we
explicitly forecast long-term valuation drivers using UBS’s VCAM tool. We
assume a higher WACC of 12% (from 11%) as we increase our beta
assumption and exclude non-core investments from the price target.
Three key reasons to Buy
As Retail is among the largest industries in the world, we are bullish on the
potential of the sector in India. Pantaloon is the largest player and hence will
be the biggest beneficiary from the growth of the sector, in our view.
PRIL has corrected 50% from its peak in October 2010, despite buoyant
consumer sentiment in the same period. The changes that have affected PRIL
are: 1) an increase in the cost of capital; 2) the reduced risk appetite of
investors; and 3) no clarity on restructuring timelines.
PRIL is trading at 17-18x FY12 EPS estimate (we are 15% lower than
consensus), the trough of its average historical valuation, and in our opinion,
an extremely attractive valuation to get exposure to the nascent retail sector.
We however remain mindful of the near-term margin pressure, higher leverage,
excess working capital requirements that remain an overhang on stock
performance.
Reduce earnings estimates
We lower earning estimates by 29%/18%/19% for FY11/12/13 as we:
1) Reduce our margin assumptions by 20/60/60bps to reflect higher
pressure from rising RM costs.
2) We also increase our interest costs by 7% in FY11
3) We increase tax costs by 21% and 27% to incorporate higher incidence
of tax rate.
Due to the substantial earnings cut, we are currently 30%/24%/19% below
consensus in FY11/12/13 PAT estimates (Table 2).
We believe consensus has not yet factored in the earnings concerns on higher
RM costs and interest costs. In addition, after the realignment of the PRIL
business, consensus estimates are not fully reliable as we believe consensus may
not have yet adjusted their numbers to incorporate corporate re-alignment.
Valuation
We change our valuation methodology from SOTP to DCF, where we explicitly
forecast long-term valuation drivers using UBS’s VCAM tool. We assume a
higher WACC of 12% (from 11%) as we increase our beta assumption and we
exclude non-core investments from the price target (Future Capital Holdings at
Rs23/share and Future Generali at Rs22/share).
PRIL has corrected 50% from its peak in October 2010, despite buoyant
consumer sentiment in the same period. The changes that have affected PRIL
are: 1) the increase in the cost of capital; 2) the reduced risk appetite of
investors; and 3) no clarity on restructuring timelines.
PRIL is trading at 17-18x FY12 EPS estimate (we are 15% lower than
consensus), the trough of its average historical valuation, and in our opinion, an
extremely attractive valuation to get exposure to the nascent retail sector.
Retail industry is on the cusp of a boom
We expect substantial consumption growth in India, driven by favorable
demographics and rising disposable incomes. India has a predominantly young
population that is willing to spend more on branded products. We forecast a
10% revenue CAGR for the retail market in India of Rs21,119bn by 2012.
However, we estimate an organised retail sales market of Rs2,600bn in 2012,
which would still be a fraction of the overall retail market, even though we
expect organised retail to grow from 6.6% in 2009 to 12.3% in 2012. We believe
there is a large addressable market and potential to expand for organised retail
over the next few years. We forecast ~25% revenue CAGR for the organised
retail sector (2011-15).
We remain bullish on the retail growth story in India and believe players in
organised apparel retailing will be the major beneficiary. PRIL is the largest
player in organised retailing and we expect the company to register strong SSSG
across businesses in the near-medium term. We estimate SSSG of 10-12%, 6-
7% and 9-10% in the medium term for PRIL’s lifestyle, value and home
solutions businesses, respectively.
We believe, once FDI opens, growth rates would moderate owing to increasing
competition. We expect PRIL’s core retail business to grow 24%/23.6% YoY in
FY11/12.
There continues to be an overhang on PRIL’s complicated holding structure and
highly levered balance sheet (FY11E D/E at 0.98x). Debt has increased by
Rs6bn in H1 FY11 to Rs36bn. In addition to this, PRIL has high working capital
requirements, which have applied pressure on its cash generation.
Inventory days improvement, monetization in few of its investments (we have
assumed that investments worth Rs5bn will be monetized in FY11) and a
demerger of Future Capital and Future Generali would be key going forward, in
our view.
Q2 FY11 results summary
Pantaloon’s Q2 FY11 revenues were at Rs27.6bn (+31% YoY). SSSG for value,
lifestyle and home retailing was 11.5%, 21% and 18.3%, respectively. EBITDA
grew 11% YoY to Rs2.4bn. Higher interest costs affected PBT, which grew 4%
YoY to Rs708m; PAT was +5% YoY to Rs.472m (UBS-e Rs615m).
Main highlights
1. Standalone sales grew 3% QoQ, EBITDA margins improved 80bps
YoY to 10.5% due to 30bps fall in COGS/sales and 50bps fall in
employee expenses/sales.
2. FVRL sales grew 9%, EBITDA margins were flat QoQ at 7.4%.
3. PRIL announced the sale/transfer of its e-zone business to a wholly
owned subsidiary, subject to shareholder approval. Our core business
estimates still include e-zone operations.
4. Standalone debt as at the end of Dec’10 increased to Rs.18bn from
Rs.13.8bn as at the end of Jun’10.
Store expansion
In Q2 FY11, the company opened 50 stores of 0.8msq/feet. This included five
Pantaloon, two Centrals, one E-zone, seven Big Bazaars and 36 KB Fair Price
Stores. The company closed one Food Bazaar store in Q2 FY11. We have built
in 17%/14% growth in retail space in FY11/12.
Pantaloon Retail (India) Ltd.
Pantaloon is India's largest listed retailer. It is rapidly building retail capacity in
its two main retailing formats: lifestyle and value retailing. In the lifestyle
segment, its Pantaloon stores and the upcoming Central stores offer apparel and
fashion items targeting the middle-income market. Its Big Bazaar discount
stores target the price-conscious apparel and grocery markets (the latter through
the Food Discount brand).
Statement of Risk
The retail sector is closed to foreign competition, but this could change. The
entry of large format foreign retailers with skills in merchandising and supply
chain management could affect the sales and margins of Indian companies such
as Pantaloon.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
UBS Investment Research
Pantaloon Retail (India) Ltd.
Valuations at trough multiples, fundamentals intact
Revenues in line; product mix and leverage hurt profits
Pantaloon Retail’s (PRIL) Q2 FY11 revenues were at Rs27.6bn (+31% YoY).
Same-store-sales growth (SSSG) for value, lifestyle and home retailing was 11.5%,
21%, and 18.3%. EBITDA grew 11% YoY to Rs2.4bn. Higher interest costs
affected PBT, which grew 4% YoY to Rs708m, and PAT which rose 5% YoY to
Rs472m (UBS-e Rs615m).
Concerns warranted but built into stock price
There is an overhang on PRIL’s complicated holding structure and highly levered
balance sheet. PRIL has high working capital requirements as well. We lower our
EPS estimates from Rs12.05/16.17/23.23 to Rs9.22/14.38/20.25 for FY11/12/13.
PRIL’s stock price has corrected 50% from its peak in October 2010, which has
built in these concerns.
Fundamentals intact
With India among the most attractive retail destinations, PRIL being the largest
retailer is in a sweet spot. We believe PRIL will continue store expansion at a
lower pace, and shift focus to cash generation and optimal capital deployment.
PRIL’s stock price decline is an attractive buying opportunity, in our view.
Valuation: lower price target from Rs500 to Rs350; maintain Buy
We change our valuation methodology from sum-of-the-parts (SOTP) to DCF,
where we explicitly forecast long-term valuation drivers using UBS’s VCAM tool.
We assume a WACC of 12% and a terminal year growth rate of 5%.
Earnings concerns priced in
PRIL is a high beta stock and in the current uncertain environment, the stock has
taken more of a hit than the broader market (see Chart 1). We lower our price
target to Rs350 to incorporate:
Reduced earnings estimates due to higher material costs, worsening
product mix, higher interest and tax costs. We lower our EPS estimates by
29%/18%/19% for FY11/12/13;
The change in valuation methodology to DCF (from SOTP) where we
explicitly forecast long-term valuation drivers using UBS’s VCAM tool. We
assume a higher WACC of 12% (from 11%) as we increase our beta
assumption and exclude non-core investments from the price target.
Three key reasons to Buy
As Retail is among the largest industries in the world, we are bullish on the
potential of the sector in India. Pantaloon is the largest player and hence will
be the biggest beneficiary from the growth of the sector, in our view.
PRIL has corrected 50% from its peak in October 2010, despite buoyant
consumer sentiment in the same period. The changes that have affected PRIL
are: 1) an increase in the cost of capital; 2) the reduced risk appetite of
investors; and 3) no clarity on restructuring timelines.
PRIL is trading at 17-18x FY12 EPS estimate (we are 15% lower than
consensus), the trough of its average historical valuation, and in our opinion,
an extremely attractive valuation to get exposure to the nascent retail sector.
We however remain mindful of the near-term margin pressure, higher leverage,
excess working capital requirements that remain an overhang on stock
performance.
Reduce earnings estimates
We lower earning estimates by 29%/18%/19% for FY11/12/13 as we:
1) Reduce our margin assumptions by 20/60/60bps to reflect higher
pressure from rising RM costs.
2) We also increase our interest costs by 7% in FY11
3) We increase tax costs by 21% and 27% to incorporate higher incidence
of tax rate.
Due to the substantial earnings cut, we are currently 30%/24%/19% below
consensus in FY11/12/13 PAT estimates (Table 2).
We believe consensus has not yet factored in the earnings concerns on higher
RM costs and interest costs. In addition, after the realignment of the PRIL
business, consensus estimates are not fully reliable as we believe consensus may
not have yet adjusted their numbers to incorporate corporate re-alignment.
Valuation
We change our valuation methodology from SOTP to DCF, where we explicitly
forecast long-term valuation drivers using UBS’s VCAM tool. We assume a
higher WACC of 12% (from 11%) as we increase our beta assumption and we
exclude non-core investments from the price target (Future Capital Holdings at
Rs23/share and Future Generali at Rs22/share).
PRIL has corrected 50% from its peak in October 2010, despite buoyant
consumer sentiment in the same period. The changes that have affected PRIL
are: 1) the increase in the cost of capital; 2) the reduced risk appetite of
investors; and 3) no clarity on restructuring timelines.
PRIL is trading at 17-18x FY12 EPS estimate (we are 15% lower than
consensus), the trough of its average historical valuation, and in our opinion, an
extremely attractive valuation to get exposure to the nascent retail sector.
Retail industry is on the cusp of a boom
We expect substantial consumption growth in India, driven by favorable
demographics and rising disposable incomes. India has a predominantly young
population that is willing to spend more on branded products. We forecast a
10% revenue CAGR for the retail market in India of Rs21,119bn by 2012.
However, we estimate an organised retail sales market of Rs2,600bn in 2012,
which would still be a fraction of the overall retail market, even though we
expect organised retail to grow from 6.6% in 2009 to 12.3% in 2012. We believe
there is a large addressable market and potential to expand for organised retail
over the next few years. We forecast ~25% revenue CAGR for the organised
retail sector (2011-15).
We remain bullish on the retail growth story in India and believe players in
organised apparel retailing will be the major beneficiary. PRIL is the largest
player in organised retailing and we expect the company to register strong SSSG
across businesses in the near-medium term. We estimate SSSG of 10-12%, 6-
7% and 9-10% in the medium term for PRIL’s lifestyle, value and home
solutions businesses, respectively.
We believe, once FDI opens, growth rates would moderate owing to increasing
competition. We expect PRIL’s core retail business to grow 24%/23.6% YoY in
FY11/12.
There continues to be an overhang on PRIL’s complicated holding structure and
highly levered balance sheet (FY11E D/E at 0.98x). Debt has increased by
Rs6bn in H1 FY11 to Rs36bn. In addition to this, PRIL has high working capital
requirements, which have applied pressure on its cash generation.
Inventory days improvement, monetization in few of its investments (we have
assumed that investments worth Rs5bn will be monetized in FY11) and a
demerger of Future Capital and Future Generali would be key going forward, in
our view.
Q2 FY11 results summary
Pantaloon’s Q2 FY11 revenues were at Rs27.6bn (+31% YoY). SSSG for value,
lifestyle and home retailing was 11.5%, 21% and 18.3%, respectively. EBITDA
grew 11% YoY to Rs2.4bn. Higher interest costs affected PBT, which grew 4%
YoY to Rs708m; PAT was +5% YoY to Rs.472m (UBS-e Rs615m).
Main highlights
1. Standalone sales grew 3% QoQ, EBITDA margins improved 80bps
YoY to 10.5% due to 30bps fall in COGS/sales and 50bps fall in
employee expenses/sales.
2. FVRL sales grew 9%, EBITDA margins were flat QoQ at 7.4%.
3. PRIL announced the sale/transfer of its e-zone business to a wholly
owned subsidiary, subject to shareholder approval. Our core business
estimates still include e-zone operations.
4. Standalone debt as at the end of Dec’10 increased to Rs.18bn from
Rs.13.8bn as at the end of Jun’10.
Store expansion
In Q2 FY11, the company opened 50 stores of 0.8msq/feet. This included five
Pantaloon, two Centrals, one E-zone, seven Big Bazaars and 36 KB Fair Price
Stores. The company closed one Food Bazaar store in Q2 FY11. We have built
in 17%/14% growth in retail space in FY11/12.
Pantaloon Retail (India) Ltd.
Pantaloon is India's largest listed retailer. It is rapidly building retail capacity in
its two main retailing formats: lifestyle and value retailing. In the lifestyle
segment, its Pantaloon stores and the upcoming Central stores offer apparel and
fashion items targeting the middle-income market. Its Big Bazaar discount
stores target the price-conscious apparel and grocery markets (the latter through
the Food Discount brand).
Statement of Risk
The retail sector is closed to foreign competition, but this could change. The
entry of large format foreign retailers with skills in merchandising and supply
chain management could affect the sales and margins of Indian companies such
as Pantaloon.
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