Pantaloon Retail - A right move : Edelweiss PDF link

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Pantaloon Retail (PRIL) has announced sale of 53.67% stake in Future Capital Holdings in two tranches to Warburg Pincus LLC. In the first tranche, PRIL will sell 40% of its stake at INR162/share (consideration: INR4198mn), and will continue to hold 13.67% in FCH which they are likely to offload in open offer. This comes in a move to deleverage its balance sheet by selling stake in its non-retail assets which will reduce its burgeoning debt. With the exit from Future Capital, we believe PRIL will benefit from reduced interest expenditure and focus on its core retail business; and would also be looking for a partner for the same. However, slow SS growth (compared to peers like Shoppers Stop), high debt and higher inventory days remain key concerns. Maintain ‘HOLD’.

Deal to improve consolidated debt

The deal would reduce debt of consolidated entity by INR36bn (debt in the books of Future Capital). Also the consideration received from this transaction will be utilized to reduce core retail debt. In Q3FY12, PRIL paid over 90% of its EBIT as interest expense in its core retail business, causing profit to decline 76.2% YoY.

Pick-up in pace of deleveraging

Demerger and subsequent sale of Pantaloon retail format to Aditya Birla Nuvo will help reduce debt by INR16bn). Further, PRIL raised INR2bn by issuing 8.16mn shares to Bennett Coleman & Co at INR245 on preferential basis. We expect the core retail debt to reduce to ~INR30bn (INR51bn in December 2011) over the coming quarters.

Outlook and valuations: Challenging; maintain ‘HOLD’

We are encouraged by the de-leveraging exercise and would seek more clarity on debt position. At CMP, the stock is trading at 36.9x FY12E and 27.5x FY13E EPS. We maintain ‘Hold’ on the stock and recommend ‘Sector Underperformer’ rating on a relative return basis.

EdelFlash: Pantaloon Retail - A right move

Regards,