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UBS Investment Research
Pantaloon Retail (India) Ltd.
Valuation hard to ignore
Compelling valuations
PRIL’s complicated holding structure, high working capital requirements and
highly levered balance sheet is reason for concern but current valuations are hard
to ignore. Pantaloon is trading at 18x FY12E earnings, and ~40% discount to sector
valuation at 30x FY12E PE– despite being the dominant retailer
Positive catalysts will warrant re-rating
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.
Strong growth prospects
With India among the most attractive retail destinations, PRIL being the largest
retailer is in a sweet spot.. We expect PRIL’s core retail business to grow
24%/23.6% YoY in FY11/12 with profit growth of 42%/41%. We believe PRIL
will continue store expansion at a lower pace, and shift focus to cash generation
and optimal capital deployment.
Valuation: trading at 42% discount to sector valuation
Valuation remains attractive for PRIL at 18x FY12E earnings vs. sector’s 30x. At
our price target, the implied valuation of PRIL is PE of 24x FY12E; 17% discount
to the sector. We value PRIL through 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%..
Key investment positives which we believe are not priced in the current
valuation
International JV could provide a case for re-rating: We
think a pure hypermarket/convenience store business, which has considerable
scale, would be an appropriate joint venture vehicle for a large international
retailer setting up back-end operations in India. The international retailer could
capitalise on PRIL’s network and also establish its own cash and carry business.
An agreement with a foreign retailer for back-end operations would enable PRIL
to benefit from its partner’s expertise in supply chain management, sourcing
strategies and inventory management. A JV may also give PRIL an edge in price
negotiations with the suppliers, depending on the scale of a partner’s operations
and its own wholesale business.
A JV with an international retailer would also bring global best practice,
information technology and knowledge for PRIL that could be used to revamp
its exiting assets. We believe this could improve its working capital turns and
returns and potentially result in a re-rating of the stock.
From the perspective of a foreign retailer, we think a JV would also be a good
proposition, as it would have access to the largest front-end operation in India
and the ability to establish a clear needs-based relationship with the Indian
retailer.
Window of opportunity once FDI opens up: Once FDI opens
up; PRIL's value retail arm will emerge as an attractive buyout of Indian retail.
The reason we believe PRIL s value retail is attractive to a foreign retail player:
1. Location advantage: Big Bazaar and its offshoots are present in all the most
attractive shopping hubs in the country.
2. Established logistics, own brands and brand equity. Being the longest in the
business, Big Bazaar has established a robust backend and importantly human
capital that is so important to the running of a retail chain.
3. Willingness to divest and partner- PRIL's management is open to divest and
grow using acquired funds, unlike other private retailers that still haven't shown
willingness to do so.
Releasing funds for future growth: Divesting FCH and insurance
business would raise funds for expansion. We estimate the sale of a 49% stake
in the insurance business and the sale of FCH stake (at the current market price)
would raise Rs5-6bn. Though the company has delayed in delivering on this
causing the stock to de-rate, we believe, will prove to be a major catalyst going
forward, in our view.
Our price target does not include value of FCH and insurance business.
Valuation
Valuation remains attractive for PRIL at 18x FY12E earnings vs. sector’s 30x.
We believe the discount to sector due to concerns relating to complicated
holding structure and highly levered balance sheet is warranted however not to
such at extent. At our price target, the implied valuation of PRIL is PE of 24x
FY12E which still is at a 17% discount to the sector.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
UBS Investment Research
Pantaloon Retail (India) Ltd.
Valuation hard to ignore
Compelling valuations
PRIL’s complicated holding structure, high working capital requirements and
highly levered balance sheet is reason for concern but current valuations are hard
to ignore. Pantaloon is trading at 18x FY12E earnings, and ~40% discount to sector
valuation at 30x FY12E PE– despite being the dominant retailer
Positive catalysts will warrant re-rating
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.
Strong growth prospects
With India among the most attractive retail destinations, PRIL being the largest
retailer is in a sweet spot.. We expect PRIL’s core retail business to grow
24%/23.6% YoY in FY11/12 with profit growth of 42%/41%. We believe PRIL
will continue store expansion at a lower pace, and shift focus to cash generation
and optimal capital deployment.
Valuation: trading at 42% discount to sector valuation
Valuation remains attractive for PRIL at 18x FY12E earnings vs. sector’s 30x. At
our price target, the implied valuation of PRIL is PE of 24x FY12E; 17% discount
to the sector. We value PRIL through 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%..
Key investment positives which we believe are not priced in the current
valuation
International JV could provide a case for re-rating: We
think a pure hypermarket/convenience store business, which has considerable
scale, would be an appropriate joint venture vehicle for a large international
retailer setting up back-end operations in India. The international retailer could
capitalise on PRIL’s network and also establish its own cash and carry business.
An agreement with a foreign retailer for back-end operations would enable PRIL
to benefit from its partner’s expertise in supply chain management, sourcing
strategies and inventory management. A JV may also give PRIL an edge in price
negotiations with the suppliers, depending on the scale of a partner’s operations
and its own wholesale business.
A JV with an international retailer would also bring global best practice,
information technology and knowledge for PRIL that could be used to revamp
its exiting assets. We believe this could improve its working capital turns and
returns and potentially result in a re-rating of the stock.
From the perspective of a foreign retailer, we think a JV would also be a good
proposition, as it would have access to the largest front-end operation in India
and the ability to establish a clear needs-based relationship with the Indian
retailer.
Window of opportunity once FDI opens up: Once FDI opens
up; PRIL's value retail arm will emerge as an attractive buyout of Indian retail.
The reason we believe PRIL s value retail is attractive to a foreign retail player:
1. Location advantage: Big Bazaar and its offshoots are present in all the most
attractive shopping hubs in the country.
2. Established logistics, own brands and brand equity. Being the longest in the
business, Big Bazaar has established a robust backend and importantly human
capital that is so important to the running of a retail chain.
3. Willingness to divest and partner- PRIL's management is open to divest and
grow using acquired funds, unlike other private retailers that still haven't shown
willingness to do so.
Releasing funds for future growth: Divesting FCH and insurance
business would raise funds for expansion. We estimate the sale of a 49% stake
in the insurance business and the sale of FCH stake (at the current market price)
would raise Rs5-6bn. Though the company has delayed in delivering on this
causing the stock to de-rate, we believe, will prove to be a major catalyst going
forward, in our view.
Our price target does not include value of FCH and insurance business.
Valuation remains attractive for PRIL at 18x FY12E earnings vs. sector’s 30x.
We believe the discount to sector due to concerns relating to complicated
holding structure and highly levered balance sheet is warranted however not to
such at extent. At our price target, the implied valuation of PRIL is PE of 24x
FY12E which still is at a 17% discount to the sector.
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