Pantaloon Retail - In the right place at the right time; upgrade to Buy ::Edelweiss

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Pantaloon Retail (PF IN, INR 201, upgrade to Buy)

Pantaloon Retail (PRIL) will be the biggest beneficiary of FDI in multi-brand retail. India’s largest organized retail chain’s (~15msf) diverse businesses (food, fashion, home, electronics, sports) are FDI ready. The Union Cabinet’s nod to 51% FDI in multi-brand retail will help trim debt and enable it to continue expansion (2.0-2.5msf per annum). The company has also tied up 9msf of space for future expansion which makes it even more alluring from foreign retail chains’ perspective. Further, on cards is monetisation of non‐retail assets. In light of the above we are upgrading our recommendation on the stock to ‘BUY’.

Approval of FDI will prove to be the savior; expansion on track

PRIL’s balance sheet (INR45bn of core retail debt, 110 days of inventory in FY11) will be invigorated on account of infusion of funds and better systems due to tie up with a foreign retailer. As per the draft, the proposal will be effective in cities with 1 mn plus population (46 cities); these are PRIL’s primary revenue earners. Also, on cards is addition of 2.0‐2.5 msf space annually and it has already tied up 9msf space.

Business realignment to rake in moolah for retail operation

The company plans to monetize its non retail assets over the next 12‐18 months and use the proceeds to repay and trim its core retail debt. PRIL has invested ~INR12,000mn in Future Capital, Future E‐Commerce, Future Supply Chain, real estate property and insurance businesses over the past 3‐4 years and the expected valuation for these entities is ~INR30,000‐40,000mn.

Outlook and valuations: Cautious; upgrade to ‘BUY’

We like PRIL’s diversified mix of retail business and its size. However, operationally PRIL will continue to remain under pressure over the near term and burgeoning debt and higher inventory days remain key concerns. We believe FDI in multi-brand retail came at an opportune time and expect PRIL’s stock to re-rate further. At CMP, the stock is trading at 22.6x FY12E and 17.6x FY13E EPS. We upgrade our recommendation on the stock to ‘BUY’ from ‘HOLD’ and maintain ‘Sector Performer’ rating.