>PANTALOON RETAIL (MORGAN STANLEY)

Capital and Business Concerns Abating, No Transparency Yet

Upgrading PRIL to Overweight: In these volatile markets, it is difficult to time stock calls. However, we believe that two out of three of our concerns on PRIL have abated. Although the stock could be volatile in the medium term, we believe that any dip should be used an as entry opportunity. We are upgrading the stock to Overweight from Equal-weight.

Alleviating concerns about ability to fund the business: PRIL recently raised Rs3bn in equity and has plans to raise another Rs10bn. This is likely to increase its flexibility to fund its growth plans and reduce its financial leverage. More important, the company’s interest costs, which jumped from 3.7% of sales to 4.9% of sales in F2009, is likely to decline to 4.4% sales in F2010, contributing to profit growth.

Business conditions improving: We believe that PRIL’s business environment is likely to recover with an improving trend in IIP growth and consumer sentiment. SSG has seen consistent improvement over the last few months, EBITDA margin has picked up due to benign competition, and we expect the company to report positive operating cash flow for the first time in F2009.

Room for improvement in transparency: In our view, PRIL needs to enhance its transparency regarding consolidated financials, funding, and investment plans in subsidiary companies, and increase the clarity regarding holdings in subsidiary companies amongst other things.

Where could we go wrong? 1) PRIL is unable to raise equity to fund its growth plans; 2) it disproportionately funds its subsidiaries; and 3) it takes large inventory write-offs.

To see full report: PANTALOON RETAIL