Pantaloon Retail (India) Ltd.
BUY – Revision of target price
Target Price: Rs.304
CMP: Rs.254
Upside: 20%
Pantaloon Retail (India) Ltd (PRIL) has given a return of 39% since our initiation (2nd July 2012 at Rs182) and we expect the momentum in the stock price to continue going forward. We believe that the stock can offer further upside of 20% from current levels due to 1) FDI in multi-brand retail; 2) benefit from revival in retail business; 3) restructuring of businesses and reduction in debt levels and 4) unlocking of value from insurance and other non core ventures. Hence, we continue to maintain Buy rating on the stock with a revised target price of Rs.304.
Strongest retail franchise in India: PRIL is India’s largest retailer with presence of over 11mn sq ft. It operates multi-formats such as Big Bazaar, Food Bazaar, Pantaloon, Central, E-Zone and Home Solutions. Indian retail market is estimated to be $450 billion although the share of organized retail is a paltry 3%-5%. This is much less compared to emerging markets like China, Brazil where it ranges between 20%-40%. PRIL is well positioned to benefit from impending retail opportunity in India considering its 11mn sq ft of retail space across 85 cities;
Gain from FDI in multi-brand retail: Both Lok Sabha and Rajya Sabha cleared FDI in multi-brand retail in the current winter session of parliament. This development is very positive for organized retail players like PRIL. Moreover, PRIL has already taken some steps to deleverage its balance sheet by selling off its non-core assets thus making it attractive for foreign investments;
Recent deal to help reduce leverage position: The Future Group sold a majority stake in PRIL’s Pantaloon chain of stores to Aditya Birla Nuvo for Rs.1,600 crore that included Rs.800 crore of debt transfer into the new entity. Also, on June 6, 2012, PRIL allotted 81.6 lakh equity shares at Rs.245 per share (62% higher than the June 5, 2012 closing price of PRIL) to Bennett, Coleman & Co. Limited (BCCL). This along with stake sale of FCH (Future Capital Holdings) to Warburg Pincus would lead to total cash inflow of around Rs.2,360 crore which would help to pare down the debt burden. PRIL has also hinted at plans to possibly sell stakes in more non-core assets like insurance JV (Future Generali), Staples Future Office Products (39.5% stake) and close to 70% stake in Future Supply Chain (FSC), in a bid to make PRIL debt-free by March 2013;
Restructuring of fashion business: Recently, Future Group decided to restructure its fashion business wherein PRIL and Future Ventures India Ltd would de-merge its fashion business into a new entity ‘Future Fashion’ which would get listed in due course. Future Fashion will own and operate retail chains Central, Brand Factory, aLL and Planet Sports. It will emerge as a leading integrated fashion brands and retail company with domestic and global brands, an extensive distribution and retail network and manufacturing capabilities. Future Fashions will operate around 3.5 million square feet of retail space across 140 department and specialty retail stores. The portfolio of fashion brands being transferred from Future Ventures to this company include Indigo Nation, Scullers, Urbana, Urban Yoga, Jealous 21, Biba, AND, Global Desi, Turtle, Celio, Lee Cooper, Clarks, Holii, Daniel Hechter, Manchester United and Privilege Club, among others. These are also distributed through over 200 Exclusive Brand Outlets and over 1000 Multi Brand Outlets in 121 cities. This newly demerged company of PRIL is expected to be a Rs.5,000 crore business in the next two years. It has capacity of delivering EBITDA margin of 12%-13% and by merging fashion business of Pantaloon and Future Ventures, it can add 2%-3% additional EBITDA margins. Further, PRIL would transfer Rs.1,226 crore of its debt to Furture Fashion. Post the realignment, shareholders of PRIL will hold 49.8% in Future Fashion, shareholders of FVIL will hold 30.5% and 19.7% will be held by PRIL as a corporate entity;
Value unlocking potential remains high; advise Hold: We expect the company to improve its operational performance once it reduces it debt overhang, benefit from FDI in multi-brand retail and asset monetization. We maintain Buy rating with a revised target price of Rs304 (previous Rs.236 per share) based on SOTP (Sum of the parts) valuation methodology.
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