Pantaloon Retail :: Motilal Oswal

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Pantaloon Retail's (PF) 1QFY12 core retail results were below our estimates with core retail PAT down 22.8% YoY at
INR330m. Although EBITDA rose 18.6%, led by a 50bp margin expansion, a 40% higher interest burden and 31% higher
depreciation, impacted PAT growth.
 SSS growth in both the value and lifestyle segments declined 4% QoQ. Home retailing SSS growth improved to
1.3% v/s a decline of 4.5% in 4QFY11. SSS growth in value retailing dipped below the level reached during the
slowdown of 2008-09. Lifestyle SSS growth of 7% was disappointing given an extended discount period of one week
and a 16-18% price increase. We estimate same store volume decline in mid-single digits.
 Standalone sales were up 8.8%, gross and EBITDA margins increased 140bp. EBITDA was up 25% but a 57%
increase in the interest burden and 31% in depreciation ensured 29% PAT decline despite a decline in tax rate by
12%. Value retailing reported a 15.2% increase in sales and 13.4% increase in EBITDA as margins declined 20bp.
A 26% higher interest burden and 32% higher depreciation led to 18% decline in PAT.
 PF added another 0.45msf of retail space, taking the total to 15.7msf. Big Bazaar and Pantaloon have not had store
additions but rather store closures. E-zone and Food Bazaar stores are lower by six and seven stores over 4QFY11
due to closures. PF saw a major area increase in Home Town, Central and KB Fair Price Shops. It is a rare instance
of zero area addition in Big Bazaar and a decline in Food Bazaar stores.
 We believe the decline in SSS growth poses a serious challenge to PF due to high debt of INR49b and inventory of
INR36b in the core retail business as on 30 June 2011. PF may be forced to close more stores if the slowdown in
SSS growth persists in coming quarters.
 We are disappointed with the slow progress in PF's exit from non- core businesses. We believe sustaining operations
would be a challenge given poor consumer sentiment, high leverage and rising interest rates.
 We are downgrading FY12 EPS to INR8.5 (INR12.4 earlier) and FY13 EPS to INR11 (INR16.1 earlier), a downgrade
of 32%. Although the stock has corrected sharply, a slew of factors like deteriorating SSS growth, high debt and low
inventory turns limit the upside. We place our rating Under Review.
Company description
Pantaloon Retail is the largest organized retailer in India,
with a retail space of more than 14msf under its belt. It has
presence in multiple categories through different formats
like department stores (Pantaloon), hypermarkets (Big
Bazaar), seamless mall (Central) and standalone stores.
Key investment arguments
 Pantaloon is the best play in the fast growing organized
retail industry, with presence across categories and
formats. The company houses ~14msf of retail space
and enjoys a significant first mover advantage.
 The management has guided increasing share of private
labels so as to improve the company's margin profile.
Key investment risks
 Pantaloon has an aggressive expansion plan. Timely
and profitable execution is a critical issue, more so in
case of Pantaloon.
 Pantaloon has a leveraged balance sheet (D/E of ~1.1x),
which limits the possibility of further borrowings. We
believe our area addition assumption would be under
risk if cash flow generation does not materialize.
 The company continues to invest in non-retail
subsidiaries. We believe recent efforts to hive off nonretail
subsidiaries augur well and will help make
Pantaloon a pure retail play.
Recent developments
 Pantaloon reported SSS growth of 10.3% in Value
Retailing and 10.2% in Lifestyle Retailing.
 The company added 0.68msf of retail space in the March
quarter, adding 2 Pantaloons, 1 Central, 5 Big Bazaar, 3
Food Bazaar, and 37 KB's Fair Price stores.
Valuation and view
 We are downgrading FY12 EPS to INR8.5 (INR12.4
earlier) and FY13 EPS to INR11 (INR16.1 earlier), a
downgrade of 32%. Although the stock has corrected
sharply, a slew of factors like deteriorating SSS growth,
high debt and low inventory turns limit the upside. We
place our rating Under Review.
Sector view
 We are positive on the sector post the revival in
consumption sentiment. Area addition is likely to pick
up in the coming quarter, though we note that companies
are approaching space addition in a more calibrated
manner.
 Players like Pantaloon Retail, with a strong
hypermarket format and presence in larger number of
categories are likely to be major beneficiaries.
 Longer term prospects are bright, given rising incomes
and low penetration.