Pantaloon Retail – BUY Buoyant revenue growth:: IIFL

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Pantaloon Retail – BUY
Buoyant revenue growth


Pantaloon Retail’s (PRIL) core retail earnings grew 62% YoY in
1QFY11, beating our estimate. The positive surprise was driven by
strong revenue growth of 32% YoY, which was led by higher–
than-expected same-store sales (SSS) growth. Value and Lifestyle
retailing saw YoY SSS growth of 12.5% and 21.7%, respectively.
EBITDA margins, however, were below our expectation, declining
120bps YoY, as gross margin fell (on a deterioration in the
product mix, in our view). We expect stronger revenue growth in
the coming quarters, as the delayed festive season drives strong
growth in 2QFY11 and space addition, which was muted in
1QFY11, picks up in 2HFY11. We retain BUY.


SSS growth momentum strengthened further, despite a delayed
festive season this year: The Lifestyle format saw 21.7% YoY SSS growth
in 2QFY11—the fastest growth since the economic slowdown of 2008. The
Value format’s SSS growth was also strong at 12.5% YoY. The festive season
this year started in the first week of November, as against the third week of
October in FY10—a delay of three weeks. As sales usually pick up in the runup
to the festive season, 1QFY11 did not benefit from the pre-festive-season
uptick, unlike 1QFY10. The company said that underlying SSS growth trends
in 2QFY11 are even stronger than growth registered in 1QFY11.

Space addition was muted in 1Q, likely to pick up in 2H: Net retail
space addition in 1QFY11 was below 200,000 sq feet—considerably lower
than management guidance of 2.5m-3m sq ft space addition for FY11. We
expect space addition to pick up as the strong consumer sentiment and
still-benign retail commercial real estate provides the ideal environment
for an aggressive push in space expansion.
EBITDA margin decline led by lower gross margin on likely mix
deterioration, should improve going ahead: EBITDA margin fell
120bps YoY to 8.2% of sales, which was led by a 144bps YoY fall in gross
margin. This is likely due to mix deterioration towards lower-margin items
such as electronics in value retailing. According to management, however,
the recent sales trend indicates 30-40% growth in the high-margin
fashion category as the festive season is underway; this should aid
margins in 2QFY11.