>Pantaloon (CITI)

Sell: 3Q Net Profit Below Expectations as Capital Costs Soar

■ 3QFY09 operational performance strong... — EBITDA margins expanded ~210bps Y/Y and ~20bps sequentially to 10.5%; marginally above our estimates. Management's strategy of outsourcing non core operations to subsidiaries continues, resulting in lower employee costs and improving operating leverage (at the parent level).

■ ...but PAT disappoints as capital costs soar — Despite 52% growth in EBITDA, PAT growth was a muted 7% Y/Y as interest and depreciation expenses rose sharply by 98% and 65% Y/Y respectively. Capital costs as a % of operating profit (70% in 3Q) have been rising steadily over the last 10 quarters.

■ Reducing EPS estimates — by 18-30% over FY09-11E factoring in: (i) planned equity dilution over FY09E; (ii) 2-16% reduction in net profit estimates as we pare our revenue forecasts and hike capital costs. Our new target price of Rs180 (Rs184 earlier) values Pantaloon (parent) at Rs139/share, based on 15x FY10 PE (maintaining 20% premium to regional peers), Home Solutions and Future Capital are both valued at Rs21/sh of PART.

■ Debt equity ratios to trend lower, post infusion of funds — We incorporate the impact of the company's plan to raise equity worth cRs2.8bn in our estimates. Consequently, debt equity ratios trend down to 1.4x from 1.8x (for FY10E). That said, our forecasts don’t yet incorporate incremental debt on the equity raised.

■ Restructuring imponderables remain — Little clarity available on management's plan to restructure the retail and fashion divisions. We view the conversion of PART to a holding company format as a prima facie negative.

To see full report: PANTALOON