Pantaloon — Strong performance continues in Sep Q; Buy:: BofA ML

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Pantaloon — Strong performance continues in Sep Q; Buy

Price Objective Change: Sep Q profit Rs428mn, up 62% yoy; Reiterate Buy
The key positive was the strong sales growth of 32% yoy, despite negative base
effect of push back in Diwali. Also, interest costs continue to decline on improved
balance sheet. Same-Store Sales growth (SSSG) remained healthy across all
categories. We cut our est for FY11/12E by 18/12% to factor in losses from Home
retail merger. But we reiterate our Buy on a strong EPS CAGR of 80% over
FY10-12E, led by improving consumer spending, improvement in profitability
driven by backend efficiencies and organizational restructuring and continued
deleveraging. PO up to Rs655 on rollover to FY12E and MTM valuation of Future
Capital stake.


Top-line growth remains strong on encouraging SSSG
Pantaloon recorded 32% yoy growth in sales, largely in line with our est. Area
addition was lower at ~0.3mn. However, given the lumpy nature of area additions,
we maintain a 2mn area addition target this year. SSS growth remains strong at
13% for Value, 22% in Lifestyle and 15% in Home. This trend is encouraging, as
it reinforces our view that urban discretionary spending is on an upswing.

Margin declines on shift in festive season sales
Gross margin fell 140bp as 1) push back of Diwali led to shift in higher-margin
festive season sales and 2) higher contribution from lower-margin Home Retail.
This led to a 120bp operating margin decline. We expect margins to bounce back
from next qtr, as Diwali sales start to kick in. For FY11E, margins should move up
by 60bp on improvement in Home and Value profitability on improved scale and
the shift of consumers toward higher-margin discretionary categories in Lifestyle.

Balance sheet health continues to improve
Sep Q highlighted continued deleveraging, as post restructuring funding of core
retail business is largely possible through internal accruals. Also, backend
efficiencies should improve inventory levels, removing one of our key concerns.