Monday, June 18, 2012

>PANTALOONS RETAIL: Cloverdell Investment to cut its burgeoning debt

We met Mr. C.P. Toshniwal, CFO, Pantaloon Retail (PRIL), in the backdrop of the company recently cracking significant back-to-back deals to cut its burgeoning debt. These steps will trim the company’s interest expenditure and more such deleveraging exercises are on the cards as
lowering debt is the company’s prime priority currently. However, our key concerns on slow SS growth (compared to peers like Shoppers Stop), sale of higher margin ‘Pantaloon format’, high attrition in top management and higher inventory days remain. Maintain ‘HOLD’.

Business realignment to rake in moolah, trim debt
PRIL has penned deals with Bennett Coleman (INR2bn has already come), ABNL (INR8bn to come in June, further INR8bn debt to be carved off post demerger) and Cloverdell Investment (INR4.2bn will flow in by June end) to cut its burgeoning debt. We expect these deals to reduce core retail debt to ~INR33bn (from INR55bn) over coming quarters. Also, on cards is divestment of stake (in part or full) in Staples Future Office Products, Future Supply Chain, e-Zone, Home Town and Insurance business. 

Private brands, food and customer loyalty programmes on focus
The company has significant private brands contribution coming from Fashion at Big Bazaar (80% plus), Central and Brand Factory (30%) excluding its Pantaloons format. Margin within the foods business is likely to improve as PRIL undertakes backward integration. The company also plans to increase its ‘payback’ members from the current ~5mn to ~10mn by March 2013 to drive growth even during slowdown. PRIL will continue to expand at 1.5mn sq ft per annum (2mn plus earlier run rate/guidance).

Outlook and valuations: Cautious; maintain ‘HOLD’
We are enthused by the pick-up in deleveraging steps by PRIL. The company now needs to refocus on its core retail business so that it can address slow SSG and get better control on inventory and cash flow. The stock is trading at 24.2x and 17.6x FY13E and FY14E EPS, respectively. We recommend ‘HOLD’ and rate it ‘Sector Underperformer’ on relative return basis.

To read report in detail: PANTALOONS RETAIL