We met with the management of Pantaloon Retail (PF) to understand the core retail
performance, given the context of weak SSS growth and PF’s de-leveraging plans.
Sluggish demand environment: Overall consumer sentiment continues to
remain low impacted by a sluggish macro environment, high inflation as well as
moderation in discretionary consumer spending. As a consequence, discount
season for Indian Retailers has started a fortnight ahead of its usual schedule.
According to the management, consumer spending should pick up with the
onset of festival season in August-September. SSS is expected to remain
sluggish.
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Space addition of 1.5m sq.ft: PF plans to add ~1.5m sq.ft of retail space annually
for the next two years across its retail formats (excluding PF format stores). We
are building in additional ~1m sq.ft space in our model to account for execution
risks. As per management, once the current de-leveraging deals are done, focus
would be back on expansion, with Food and Fashion being the core drivers. Deleveraging
deals, which are already announced, will help reduce core retail debt
by Rs22.5-23bn to Rs35bn. However, there are more such deals possible viz. a)
Stake sale in Staples which can fetch ~Rs1.4bn (post tax) b) Stake sale in
Insurance JV - ~Rs10bn and c) Divestments in Home Town and e‐Zone, if
realized, could aid the balance sheet further.
Noise around FDI in retail: We don’t see near-term benefits for PF even if FDI in
multi-brand retail goes through. Given the fractious political environment
(principal opposition party against the proposed reform) and the underlying
conditionalities (back end investments etc.), it will be a while before any deal
with overseas retailer is worked out. Rather, GST will be more beneficial as it will
lead to efficiencies in supply chain and savings of ~50bps in operating costs. We
maintain our ‘Accumulate’ rating on the stock and look for improvement in
same-store growth metrics before getting more constructive.
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