Thursday, May 3, 2012

>PANTALOONS RETAIL LIMITED: De-merger to ease debt but also take away higher margin business…

Pantaloon Retail (PRIL) has announced its intent to de-merge its Pantaloon Retail format (including Pantaloon Retail and Pantaloon Factory Outlet). Aditya Birla Nuvo (ABNL) will invest | 800 crore by subscribing to debentures issued by PRIL, which will be converted into equity shares in the de-merged entity (on completion of the de-merger process). The existing shareholders of PRIL, including its promoters will continue to own shares in the de-merged entity. Also, PRIL will transfer its apportioned debt of | 800 crore to the de-merged entity. ABNL will also make an open offer for a minimum of 26% of the stake of the resulting entity. Post listing of the resulting entity and conversion of the debentures, ABNL will hold a 50% stake in the new entity. The Biyanis and the public will hold 25% each. According to a press release by ABNL, the proposed transaction will take eight to 10 months to be completed. Hence, we have not factored the impact of the same in our financials until further clarity on the issue emerges.

 Deal appears to be P&L neutral for PRIL and a win-win for ABNL
According to our quick calculations, we believe the amount saved on interest outgo (due to lower debt) will be forgone in the operating profit loss due to the high margin apparel business being parted with. ABNL, on the other hand, will be able to leverage PRIL’s strong retail presence and also diverse product mix.

PRIL has taken a considerable beating on the Street considering the mounting debt and inventory levels. While this deal seems to be P&L neutral, we believe the inventory days (that the company has been trying to reduce) will come down as the apparel business is a low churn business as compared to the food segment. However, we have not made any changes to our estimates as the deal will be completed over the next two to three quarters. Our numbers will be positively impacted by (a) relaxation of FDI norms and (b) stake sale in non-core segments. We continue to value PRIL at 0.6x FY13E EV/sales (based on 20% discount to Shoppers Stop) to arrive at a target price of | 173. Considering the reduction in debt, we have upgraded the stock from SELL to HOLD.