>PANTALOON RETAIL (CENTRUM)

Focus shifts to profitability

Pantaloon Retail India’s (PRIL) revenue for FY09 (June year ending) rose 25.6% YoY to Rs63.4bn and EBITDA surged 45.2% to Rs6.7bn, inline with our estimates. However, higher depreciation resulted in lower 11.6% PAT growth at Rs1.4bn vs our estimate of Rs1.5bn. EBIDTA margin expanded 142bp to 10.5%, mainly on account of cost reduction.

■ Average sales per sq ft down: Same-stores-sales growth was tepid at 7% and this coupled with lower contribution from new stores resulted in 7% reduction in average sales per sq ft to Rs7,220 (vs Rs7,763 in FY08). The company expects to add 3mn sq ft over the next three years.

■ Cost rationalisation helps boost margin: The 142bp expansion in margin to 10.5% surprised as it was achieved despite the 40bp fall in gross margin. The management attributed this margin expansion to rationalisation across heads.

■ EBIDTA margins to improve: We believe steps to increase full price merchandise and core merchandise would help improve sales per sq ft. Further, rationalisation of warehousing and logistic costs is also expected to boost EBITDA margins going forward.

■ Focus shifts to profitability: The management has shifted its strategy from store roll-out to profit growth. We remain positive on the company and maintain our fair value of Rs389 on SOTP. We value retail business on DCF at Rs345, FCH at Rs39 and HSRIL at Rs6.

To see the full report: PANTALOON RETAIL

>LUPIN LIMITED (DOLAT CAPITAL)

Right Fomula(tion)...!!!

Lupin has successfully transformed itself from a Tier-II API manufacturer to a fully integrated global generic player. It has managed to deliver superior track record growth (86% CAGR in export formulations; 23% CAGR in domestic formulations over FY06-09) with a balanced business portfolio. Its growth strategy entwines an interesting mix of strategic acquisitions that compliments its existent business-mix. There exists a positive surprise in case of any favourable outcome from the re-inspection due in the next 3-4 months. We initiate coverage with an “Accumulate” rating on the stock with a target price of Rs.1291 (PER of 15xFY11E).

Investment Rationale
■ Among the largest vertically integrated generic players.
Lupin has transformed itself from an API manufacturer to a fully integrated generic company.Formulations constitute a dominant share - 81% of the product mix with API’s mainly captively consumed. Its emphasis on complex generics and branded formulations in niche therapeutic areas fetches relatively higher margins.

■ Balanced Business Portfolio.
It has not only consolidated its position in the domestic market (35% sales) but established its credentials in the export formulations market The company has gradually reduced dependency on Anti-TB’s and cephalosporins and increased its focus on high growth lifestyle category - CVS, CNS etc.

■ Export Formulations – Growth Engine
The company derives 51% of sales (FY09) from export formulations. Its exceptional track record in US generics (9th largest by prescription) is primarily attributed to selective product launches (limited competition) and increasing contribution from branded formulations. We anticipate the success model to be replicated in key European markets while it consolidates its position in Japan – 2nd largest market. We estimate export formulations to grow by 28% CAGR over

■ FY09-11E and contribute 58% of sales.
Domestic Formulation business: An Established Cash Cow... Lupin owns 2.7% market share and ranks 5th in the domestic pharma market with leadership in Anti-TB (48% share) and Anti-Asthma (12% share) segments. Gradual migration towards fast growing chronic based portfolio and incisive marketing strategies has resulted in consistent outperformance vis-à-vis the domestic industry with 23% CAGR over FY07-09. We estimate the division to record 20% CAGR over FY09-11E to Rs.16.4bn.

■ Grey clouds over Mandideep FDA compliance - suppress valuations
The warning letter issued however doesn’t impact sales of existing products; although no new products including pending applications (1 pending approval) will be approved until a favorable resolution.We believe outcome from the reinspection due in the next 3-4 months remains crucial to future US sales and will until then remain an overhang on overall valuations.

Valuations
At CMP, the stock trades at 15.8x FY10E and 12.4x FY11E earnings. We believe current valuations do not fully reflect scalability in Lupin’s business model (23% EPS growth over FY09-11E and strong return ratios). We value the stock at 15x FY11E earnings (~10% discount to average multiple of large cap peers) with a target price of 1291/- and recommend “Accumulate” on the stock.

To see full report: LUPIN LIMITED

>VARUN SHIPPING LIMITED (KREDENT FINANCE)

………………. Sailing in Bad Times

Company Background:
VSL is an integrated hydrocarbon shipping company, commenced operations in 1973 and currently is the operator of largest LPG fleet under Indian flag. The company is a global player in energy transportation and offshore exploration and production (E&P) support services.

Investment Rationale:
· VSL currently owned LPG carrier fleet of 11 vessels, which is the largest in India in terms of both fleet size and cargo carrying capacity of 319,682 dead weight tons (dwt). The company has a major 86.0 percent of the total LPG tonnage (on dwt basis) under Indian Flag

· The company has delivered value to its shareholders in the form of paying dividends. The company has impressive track records of paying continuous dividends since past 24 years, and at current market price dividend yield’s stands over 8.0 percent

· For the financial year FY09, major portion of revenue has clocked from repeat customers, contributing 80.94 percent to total revenue earned by the company, showing faith of the clients
towards the VSL business model

· VSL has increased its asset base and business operations in the offshore segment to capitalize the rapidly developing oil and gas exploration and production industry. VSL revenue contribution from offshore segment has increased significantly from 3.55 percent in FY07 to 20.0 percent in FY09

Key Risks:
· It is predominantly in LPG carriers business which accounts 57.72 percent of overall revenues in FY09. Hence any amendments in government policy, new regulatory compliance would affect the company adversely

· VSL debt-to-equity ratio is very high as compared to its peer players, while the interest coverage ratio has also fallen over years to mere 1.86 times in FY09, which remains a cause of
concern

To see full report: VARUN SHIPPING LIMITED

>Phoenix Mills Limited (CRISIL)

■ Under penetrated organised retail provides bright industry prospects
Under-penetration of the organised retail market, rising disposable income and favorable demographics buoy India’s retail sector. However, these prospects are partly subdued by the fragmented industry and low entry barriers.

■ Phoenix pioneered an innovative concept of the Market City
Phoenix Mills Limited (Phoenix) pioneered the Market City concept in India. It refers to a multi-use premise for retail, commercial, entertainment as well as hospitality needs. The economic strength of the concept is derived from the inherit nature of business offerings, extensive range of services enabling larger footfalls and higher longevity at the premise.

■ HSP provides revenue stability; expansion will augment steadiness
High Street Phoenix (HSP) contributes nearly 99% of the lease revenues. Out of 0.5 million square feet (msft) leased area; anchor tenants occupy nearly 40% and contribute almost a quarter of revenues. HSP’s revenues are expected to be Rs 2.0 Bn by FY12, translating into a 32% 3-year CAGR, with 0.9 msft of leased area.

■Aggressive plans to launch Market Cities will double revenues
Phoenix plans to launch Market Cities in four major cities in India. With around 7.7 msft of retail and commercial area currently under development and expected to be operational through FY12 and beyond, we expect Phoenix’s revenues to be Rs 3.5 Bn in FY12, translating into a 3-year CAGR of 33%.

■ Phoenix’s financial performance is highly sensitive to occupancy rates
Phoenix’s financial performance is highly sensitive to its occupancy rates at its upcoming Market City projects. We have assumed occupancies in range of 60-75% during the initial few years of the Market Cities becoming operational. However, any change in this underlying assumption will materially impact the overall financial performance as well as valuation of the company.

■ Expansion looks highly aggressive especially looking at the past record
Although the management of the company has done well so far at a single location, viz, HSP, we feel that the ongoing expansion of more than 9 msft (as against the existing 0.9 msft until June 2009) at various market cities pose challenges of scale, complexity and demand risks which are significantly greater than what has been hitherto managed.

■ We assign Phoenix ‘2/5’ on fundamental and ‘3/5’ on valuation
We assign a fundamental grade of ‘2/5’, indicating that its fundamentals are ‘Moderate’ relative to other listed securities. While good industry prospects and expected revenue from upcoming market cities positively influence our grading, limited execution track record of management and aggressive expansion plans weigh down our overall grading. A valuation grade of ‘3/5’ indicates that the current market price is ‘Aligned’ to our fundamental value per share (Fundamental Value of Rs 160 per share).

To see full report: PHOENIX MILLS LIMITED