Pantaloon:: 3QFY11: disappointing results Pantaloon reported disappointing results for 3QFY11. Revenue growth was a 18% YoY despite healthy space growth with same store sales growth of 9-10% across segments. PBT growth was a modest 14%. The inventory buildup seen in H1 continued (+Rs3.4bn in 3Q) and the progress seen in FY10 on this front has unwound. Core retail debt stands at Rs38bn. We downgrade earnings by 6-18% and our price target to Rs235. We expect the earnings uncertainty and deteriorating balance sheet to prevent a rerating. Downgrade to U-PF from O-PF earlier. Top line slows sharply; margins along expected lines Core retail (standalone + Future Value Retail) sales growth was 18% YoY with same store sales growth of 10.3% in value retail, 10.2% in lifestyle and 9.1% in home retail. Same store sales growth in lifestyle and home retail has slowed sharply and was less than half that in 2Q. The company attributes the poor sales performance to low footfalls in Feb-March and low sales of summer electronics due to a delayed season in some regions. Pantaloon has increased promotions in April to drive sales. The company has taken inflation driven price hikes of 16% in apparel. The impact of this on volumes remains uncertain at this stage. Space growth was 0.7m sq ft in 3Q with another 0.7m expected in 4Q. Ebitda margins were up 20bps QoQ at 8.8%. Ebitda and PBT grew 14% YoY. PAT growth was 35%, inflated due to a high tax rate in 3Q10. Balance sheet concerns heighten Pantaloon’s balance sheet performance was disappointing. Inventory increased by Rs3.4bn during the quarter. Management attributed this to a build up of inventory for new store openings and inflation linked increases. This follows an already high inventory buildup in H1, which was expected to moderate following the sale season in January, and is at odds with earlier focus to increase inventory turns. Inventory per square foot is higher than in September 2009 while inventory/sales has recovered to nearly the same level with the reduction seen in FY10 having unwound. Capex during the quarter was ~Rs2.8bn while additional investments were Rs0.6-0.7bn - mainly in insurance. Debt for core retail stood at Rs38bn (~Rs35bn in 2Q). Earnings cut yet again; downgrade to U-PF We downgrade revenues and Ebitda marginally despite higher space assumptions on the back of lower same store sales. The earnings downgrade is more significant (6-18% for FY11-13) due to higher interest and depreciation charges. We also cut our SOTP based price target to Rs235, 2% downside, valuing the core retail business at 15x FY13 PE. Despite the depressed stock price (down 41% in 12 months), we see the earnings uncertainty and deteriorating balance sheet discipline as substantial headwinds to a rerating. Downgrade to U-PF from O-PF earlier

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3QFY11: disappointing results
Pantaloon reported disappointing results for 3QFY11. Revenue growth
was a 18% YoY despite healthy space growth with same store sales
growth of 9-10% across segments. PBT growth was a modest 14%. The
inventory buildup seen in H1 continued (+Rs3.4bn in 3Q) and the
progress seen in FY10 on this front has unwound. Core retail debt stands
at Rs38bn. We downgrade earnings by 6-18% and our price target to
Rs235. We expect the earnings uncertainty and deteriorating balance
sheet to prevent a rerating. Downgrade to U-PF from O-PF earlier.
Top line slows sharply; margins along expected lines
Core retail (standalone + Future Value Retail) sales growth was 18% YoY with
same store sales growth of 10.3% in value retail, 10.2% in lifestyle and 9.1%
in home retail. Same store sales growth in lifestyle and home retail has
slowed sharply and was less than half that in 2Q. The company attributes the
poor sales performance to low footfalls in Feb-March and low sales of summer
electronics due to a delayed season in some regions. Pantaloon has increased
promotions in April to drive sales. The company has taken inflation driven
price hikes of 16% in apparel. The impact of this on volumes remains
uncertain at this stage. Space growth was 0.7m sq ft in 3Q with another 0.7m
expected in 4Q. Ebitda margins were up 20bps QoQ at 8.8%. Ebitda and PBT
grew 14% YoY. PAT growth was 35%, inflated due to a high tax rate in 3Q10.
Balance sheet concerns heighten
Pantaloon’s balance sheet performance was disappointing. Inventory
increased by Rs3.4bn during the quarter. Management attributed this to a
build up of inventory for new store openings and inflation linked increases.
This follows an already high inventory buildup in H1, which was expected to
moderate following the sale season in January, and is at odds with earlier
focus to increase inventory turns. Inventory per square foot is higher than in
September 2009 while inventory/sales has recovered to nearly the same level
with the reduction seen in FY10 having unwound. Capex during the quarter
was ~Rs2.8bn while additional investments were Rs0.6-0.7bn - mainly in
insurance. Debt for core retail stood at Rs38bn (~Rs35bn in 2Q).
Earnings cut yet again; downgrade to U-PF
We downgrade revenues and Ebitda marginally despite higher space
assumptions on the back of lower same store sales. The earnings downgrade
is more significant (6-18% for FY11-13) due to higher interest and
depreciation charges. We also cut our SOTP based price target to Rs235, 2%
downside, valuing the core retail business at 15x FY13 PE. Despite the
depressed stock price (down 41% in 12 months), we see the earnings
uncertainty and deteriorating balance sheet discipline as substantial
headwinds to a rerating. Downgrade to U-PF from O-PF earlier