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Pantaloon has witnessed a substantial decline (~38%) in market value
over the past month: This has been led by a) expectations of easing of FDI
regulations in multi-brand retail being belied, and b) cyclical concerns about
slowing discretionary spending, high leverage, increased working capital
requirements, and the inability to divest stake in non-retail businesses.
These concerns may continue to pose risks to our earnings estimates and are
an overhang on stock valuations, notwithstanding the low valuation (20x
FY12E and 16x FY13E P/E). We downgrade the stock to Neutral with a
Jun-12 PT of Rs210. We could become more constructive on the stock
closer to trough valuations (~16-17x). That said, the relaxation of FDI
norms in the multi-brand retail segment in India could lead to a significant
re-rating for the stock and poses an upside risk.
Red flags on balance sheet make us more cautious: PRIL’s core retail
gross debt stood at Rs41.9B as of Jun-11. The increase in debt has been on
account of higher capex and increased working capital. Inventory as of
FY11 rose to 32.5% of sales (118 days) from 27% (99 days) in FY10. The
inventory rise was led by higher apparel (cotton) prices and aggressive store
expansion. With an estimated Rs20B of capex and working capital
requirements over FY11-13, we forecast the net debt/equity ratio (including
CCDS) for the company to rise to 1.6x. Pantaloon’s board has approved
fund-raising plans of upto Rs15B, although the timing remains uncertain in
the current volatile markets.
We cut our FY12/FY13 EPS estimates by 26%/30% respectively largely
on the back of 1) lower sales growth (on deteriorating discretionary
spending), 2) increased depreciation charges, and 3) higher interest payouts.
We have raised our debt, capex, and working capital assumptions and now
expect Pantaloon to have negative FCF in FY12 and FY13.
What could surprise from current levels? Any improvement in the
funding climate (monetisation of non-retail investments, relaxation in FDI
regulations in multi-brand retail) would make us more positive. Better-thanexpected
sales growth and an improved working capital cycle are upside
risks to our earnings and cash flow estimates. Key downside risks include a
deterioration in product mix and working capital, and weakness in consumer
demand.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Pantaloon has witnessed a substantial decline (~38%) in market value
over the past month: This has been led by a) expectations of easing of FDI
regulations in multi-brand retail being belied, and b) cyclical concerns about
slowing discretionary spending, high leverage, increased working capital
requirements, and the inability to divest stake in non-retail businesses.
These concerns may continue to pose risks to our earnings estimates and are
an overhang on stock valuations, notwithstanding the low valuation (20x
FY12E and 16x FY13E P/E). We downgrade the stock to Neutral with a
Jun-12 PT of Rs210. We could become more constructive on the stock
closer to trough valuations (~16-17x). That said, the relaxation of FDI
norms in the multi-brand retail segment in India could lead to a significant
re-rating for the stock and poses an upside risk.
Red flags on balance sheet make us more cautious: PRIL’s core retail
gross debt stood at Rs41.9B as of Jun-11. The increase in debt has been on
account of higher capex and increased working capital. Inventory as of
FY11 rose to 32.5% of sales (118 days) from 27% (99 days) in FY10. The
inventory rise was led by higher apparel (cotton) prices and aggressive store
expansion. With an estimated Rs20B of capex and working capital
requirements over FY11-13, we forecast the net debt/equity ratio (including
CCDS) for the company to rise to 1.6x. Pantaloon’s board has approved
fund-raising plans of upto Rs15B, although the timing remains uncertain in
the current volatile markets.
We cut our FY12/FY13 EPS estimates by 26%/30% respectively largely
on the back of 1) lower sales growth (on deteriorating discretionary
spending), 2) increased depreciation charges, and 3) higher interest payouts.
We have raised our debt, capex, and working capital assumptions and now
expect Pantaloon to have negative FCF in FY12 and FY13.
What could surprise from current levels? Any improvement in the
funding climate (monetisation of non-retail investments, relaxation in FDI
regulations in multi-brand retail) would make us more positive. Better-thanexpected
sales growth and an improved working capital cycle are upside
risks to our earnings and cash flow estimates. Key downside risks include a
deterioration in product mix and working capital, and weakness in consumer
demand.
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