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Pantaloon Retail
4QF11: Mixed Bag
4Q results for PRIL should ally investor concerns
on operating margins and interest costs. However, a
sharp increase in working capital is a key negative.
We expect PRIL to trade range bound near term.
4QF11 – Revenues below expectation: On Core retail
basis PRIL reported revenue, operating income and
PAT of Rs28.6bn, Rs2.6bn and Rs491mn respectively
compared to our expectations of Rs30.9bn, Rs2.7bn
and Rs684mn. The result was disappointing in that
revenue growth for the quarter was 8% below
expectation – adversely impacted by a sharp price
increase in apparels, persistent inflation and lower
productivity of new stores, we believe. Reported profits
were lower than expected largely due to higher
depreciation during the quarter.
Inventory buildup is negative Our base case factors in
operating efficiencies from working capital improvement.
Management has put in requisite measures to improve
efficiencies, but successful execution will be critical. It is
difficult to judge overall progress on a quarterly basis,
but deterioration in inventory management in 4Q is the
key negative, we believe. Inventory days increased from
98 days in 4QF10 to 118 days in 4QF11 driven by a
combination of ~15% price increase in apparel prices,
increased pace of new store openings and overall
slowdown in retail sales. According to management,
excluding impact from price increases and new stores,
inventory position would have been ~95 days.
EBITDA margins expand by 80bps in Core retail
versus our expectation of 30bps. Gross margins for the
core retail business increased by 110bps YoY.
Core Retail debt increased by Rs12.7bn in F11 which
combined with internal accruals of ~Rs4.6bn has funded
the increase in inventory (Rs11.8bn) and capex
(~Rs6bn), we believe.
SSG at 7.5%, 11.4% and -4.5% for the Lifestyle,
Value and Home formats respectively was lower than
our expectation of ~12% average. Total space addition
during the quarter was 0.39 Mn sq ft.
As per the management “The company believes in maintaining
its high growth momentum and leadership position over the
next few years and hence, intends to aggressively continue its
retail expansion strategy. However, supply of fresh quality real
estate space within large Indian metropolises is increasingly
becoming scarcer. The demand for this space is also expected
to increase significantly in the near future as more retail
companies vie for this space. Envisaging this future scenario,
the company went ahead with an aggressive strategy of
securing quality real estate for its future expansion plan and
has booked over 9 million square feet of retail space for its
future expansion. The company believes that this will provide a
significant competitive advantage in the near future.
To encash on the above opportunities, the company has taken
a conscious decision to pursue growth and expansion,
resulting in higher capital commitments and inventory in the
current fiscal, to fuel and sustain this growth. While there has
been an increase in capex and working capital on account of
new store openings and refurbishments coupled with the
inventory price increase, the company is committed to its
guidance of progressively reducing its inventory days.
Given its medium term strategy of reducing its overall leverage,
the company is also pursuing several initiatives towards
monetizing some of its non retail assets. Against the possibility
of FDI in retail, there exists scenarios in aligning across formats
and categories which is expected to fuel disproportionate
growth, strengthen the balance sheet and grow on a minimum
capital employed base.”
News reports on committee of secretaries clearing the
proposal to allow FDI in multi-brand retail is an unequivocal
positive for Pantaloon, in our view. Pantaloon has
demonstrated the ability to develop appropriate business
models to capture a dominant share of the consumer spending
in India. This combined with over 15mn sq feet of prime real
estate under various successful formats (versus 4-5mn for its
nearest competitor) is likely to render the company as preferred
partner among foreign retailers, we believe. We are also
excited by the likely implication that this clearance may have on
the FII holding limit for the stock (currently capped at 24%) – an
increase will likely drive significant re-rating for PRIL, in our
view.
Valuation Methodology and Risks
PT based on our Base Case DCF model value of the core retail
business (Value + Life including Home retailing) and assigning
a 50% discount factor to book value of investments in
subsidiaries and JVs. We expect operating profit CAGR of 28%
between F2010 and F2014. We have applied a WACC of
10.5%.
Downside risks:
• Execution risk in terms of store rollouts
• Sharp deterioration of working capital management
• Company increases discounts to liquidate inventory
• Increased funding requirement of its subsidiaries
An unfavourable macro & political environment might hamper
Pantaloon’s SSG
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Pantaloon Retail
4QF11: Mixed Bag
4Q results for PRIL should ally investor concerns
on operating margins and interest costs. However, a
sharp increase in working capital is a key negative.
We expect PRIL to trade range bound near term.
4QF11 – Revenues below expectation: On Core retail
basis PRIL reported revenue, operating income and
PAT of Rs28.6bn, Rs2.6bn and Rs491mn respectively
compared to our expectations of Rs30.9bn, Rs2.7bn
and Rs684mn. The result was disappointing in that
revenue growth for the quarter was 8% below
expectation – adversely impacted by a sharp price
increase in apparels, persistent inflation and lower
productivity of new stores, we believe. Reported profits
were lower than expected largely due to higher
depreciation during the quarter.
Inventory buildup is negative Our base case factors in
operating efficiencies from working capital improvement.
Management has put in requisite measures to improve
efficiencies, but successful execution will be critical. It is
difficult to judge overall progress on a quarterly basis,
but deterioration in inventory management in 4Q is the
key negative, we believe. Inventory days increased from
98 days in 4QF10 to 118 days in 4QF11 driven by a
combination of ~15% price increase in apparel prices,
increased pace of new store openings and overall
slowdown in retail sales. According to management,
excluding impact from price increases and new stores,
inventory position would have been ~95 days.
EBITDA margins expand by 80bps in Core retail
versus our expectation of 30bps. Gross margins for the
core retail business increased by 110bps YoY.
Core Retail debt increased by Rs12.7bn in F11 which
combined with internal accruals of ~Rs4.6bn has funded
the increase in inventory (Rs11.8bn) and capex
(~Rs6bn), we believe.
SSG at 7.5%, 11.4% and -4.5% for the Lifestyle,
Value and Home formats respectively was lower than
our expectation of ~12% average. Total space addition
during the quarter was 0.39 Mn sq ft.
As per the management “The company believes in maintaining
its high growth momentum and leadership position over the
next few years and hence, intends to aggressively continue its
retail expansion strategy. However, supply of fresh quality real
estate space within large Indian metropolises is increasingly
becoming scarcer. The demand for this space is also expected
to increase significantly in the near future as more retail
companies vie for this space. Envisaging this future scenario,
the company went ahead with an aggressive strategy of
securing quality real estate for its future expansion plan and
has booked over 9 million square feet of retail space for its
future expansion. The company believes that this will provide a
significant competitive advantage in the near future.
To encash on the above opportunities, the company has taken
a conscious decision to pursue growth and expansion,
resulting in higher capital commitments and inventory in the
current fiscal, to fuel and sustain this growth. While there has
been an increase in capex and working capital on account of
new store openings and refurbishments coupled with the
inventory price increase, the company is committed to its
guidance of progressively reducing its inventory days.
Given its medium term strategy of reducing its overall leverage,
the company is also pursuing several initiatives towards
monetizing some of its non retail assets. Against the possibility
of FDI in retail, there exists scenarios in aligning across formats
and categories which is expected to fuel disproportionate
growth, strengthen the balance sheet and grow on a minimum
capital employed base.”
News reports on committee of secretaries clearing the
proposal to allow FDI in multi-brand retail is an unequivocal
positive for Pantaloon, in our view. Pantaloon has
demonstrated the ability to develop appropriate business
models to capture a dominant share of the consumer spending
in India. This combined with over 15mn sq feet of prime real
estate under various successful formats (versus 4-5mn for its
nearest competitor) is likely to render the company as preferred
partner among foreign retailers, we believe. We are also
excited by the likely implication that this clearance may have on
the FII holding limit for the stock (currently capped at 24%) – an
increase will likely drive significant re-rating for PRIL, in our
view.
Valuation Methodology and Risks
PT based on our Base Case DCF model value of the core retail
business (Value + Life including Home retailing) and assigning
a 50% discount factor to book value of investments in
subsidiaries and JVs. We expect operating profit CAGR of 28%
between F2010 and F2014. We have applied a WACC of
10.5%.
Downside risks:
• Execution risk in terms of store rollouts
• Sharp deterioration of working capital management
• Company increases discounts to liquidate inventory
• Increased funding requirement of its subsidiaries
An unfavourable macro & political environment might hamper
Pantaloon’s SSG
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