>PANTALOON RETAIL (MORGAN STANLEY))

MANAGEMENT MEETING NOTES

Quick Comment – Impact on our views: We met Rakesh Biyani, Director Future Group, who heads the retail business. Our investment thesis regarding improving business outlook and availability of capital to fund growth plans continues to hold good. Management has consciously shifted focus to growth quality rather than just growth. We reiterate our Overweight rating and believe that any volatility in the stock price should be viewed as an entry opportunity. Here are the key takeaways from the meeting:

Aggressive growth and margin targets: PRIL has set an aggressive 16-17% same store growth (SSG) target for F2010. This compares with F2009 SSG of 7.0%. The company plans to achieve this target by adopting active merchandise management. First, the company is
likely to ensure that its fastest-selling products don’t go out of stock. It has increased its order per SKU range from 900-1,400 to 600-6,000 to ensure reduced stockouts for fast-selling products. Second, it has put in place a system to continuously monitor underperforming
categories/segments/SKUs so that they can be immediately replaced. Third, it has improved product quality and pricing across its merchandise (particularly private label) to ensure market share gains. Fourth, it has now set store-wise, product-wise and SKU-wise, daily/weekly sales targets so that the monitoring and feedback system improves significantly.

Focus on efficiency to improve margins: The management is targeting 200-250 bps improvement in gross profit margin, a 30% reduction in logistic costs, and a reduction in non-store inventory during F2010. Gross margin improvement is likely to be driven by
improvement in sell-through ratio (% of products sold through the primary store), from 79% in F2009 to 89% in F2010. The company achieved 79% in F2009, which was an improvement from 64% in F2008. Significant improvement in private label contribution, particularly in the apparel segment, may also help the overall mix improvement.

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