Pantaloon Retail (CMP: Rs352)
Mkt Cap: Rs58bn; US$1.3bn Bloomberg code (PF IN)
Key highlights of PRIL’s Annual Report
Operational highlights - Standalone
· In FY09, Pantaloon Retail (standalone) added 1.8m sq. ft of retail space (2.4m sq. ft in FY08) with 9.7m sq. ft of retail space under operations as of June 2009. Revenues grew by 25.6% yoy to Rs63.4bn with value retail revenues at Rs45.3bn and lifestyle retail revenues at Rs17.7bn.
· Owing to the economic slowdown in FY09, PRIL witnessed a significant slowdown in same store sales growth – for value retail to 7.4% (10% in FY08) and for lifestyle retail to 6% (10.3%). Nevertheless, the numbers are far ahead of that for rest of the industry, which witnessed same store sales decline.
· Overall EBITDA margins improved by 140bp to 10.5%. While gross margins dropped by 30bp to 30.1%, PRIL witnessed substantial savings on overheads like employee cost, advertising cost and lease rentals. Overheads have also eased as PRIL has cut down on non-profitable formats.
· While EBITDA grew by 45% in FY09, PAT is up by just 12% on the back of higher depreciation and interest costs. Interest cost increased from Rs2bn to Rs3.2bn on the back of increase in total debt from Rs21.9bn to Rs28.5bn and higher weighted average cost of debt (from 11.15% to 11.37%).
Balance Sheet highlights - Standalone
· PRIL’s balance sheet size increased by 28% from Rs41.1bn in FY08 to Rs52.4bn. Of this, capital employed on the standalone retail business has increased from Rs35.2bn to Rs42.8bn.
· PRIL issued 15.1m shares on preferential basis at Rs183/ share, thereby raising Rs2.75bn, of which 11m shares were to the promoter company – PFH Entertainment. PRIL also issued 5m warrants to promoters and promoter group at Rs183. Around one-fourth of this amount (Rs229m) was received during the year.
· Debt on the books has increased from Rs21.9bn to Rs28.5bn with secured term loan increasing from Rs12.9bn to Rs17.7bn. Debt equity ratio at the end of FY09 stood at 1.3x (levels similar to in FY08) and Debt to EBITDA has come down from 4.76x to 4.26x.
· Overall gross block addition during the year stood at Rs5bn. While capex towards furniture and fixtures was Rs1.6bn (1.8m sq. ft of retail expansion), PRIL has invested an incremental Rs1.6bn into computers and software. This investment is in line with the measures taken for improving inventory management systems.
· PRIL’s investment in subsidiaries and JVs has increased significantly during the year from Rs5.9bn to Rs9.5bn. Of the incremental Rs3.7bn of investments in subsidiaries, PRIL has invested an additional Rs1.18bn in Home Solutions Retail, Rs219m in Future Knowledge and Rs823m in Future Generali India Life Insurance.
· Net Working Capital as of end-FY09 stood at Rs23.7bn, up from Rs19.9bn in FY08. On per sq. ft basis, net working capital stood at Rs2,453, lower than Rs2,528 in FY08.
· Inventory stood at 103 days and inventory per sq. ft has increased from Rs1,815 in FY08 to Rs1,850 in FY09. Loans and advances have increased from Rs9.6bn in FY08 to Rs12bn in FY09, including Rs8.16bn of deposits (Rs7.15bn in FY08) and Rs3.57bn of advances to other-than subsidiaries (Rs1.8bn in FY08). Of the total deposits, we estimate ~Rs4.5bn to be towards deposits on existing operational stores (10-11 months of rentals) and ~Rs3bn towards upcoming stores.
Operational highlights - Consolidated
· PRIL’s consolidated revenues stood at Rs76.7bn (Rs58.4bn in FY08), pre-tax loss at Rs161m (Rs145m of pre-tax profits in FY08) and PAT after minority interest of Rs100m (Rs219m in FY08).
· Among the various subsidiaries, key contributors to PRIL’s consolidated revenues are Home Solutions Retail (contribution of Rs10.7bn), Future Agrovet (Rs3.9bn), Future Logistics (Rs1.9bn), Future Capital Holdings (Rs1.3bn) and Future e-commerce (Rs1.2bn).
· PRIL’s subsidiaries and Joint Ventures have cumulatively incurred pre-tax losses of Rs2.3bn. Of this, Home Solutions business has accounted for Rs569m of losses, Future Capital Finmart Services (Future Money) incurred losses of Rs469m and pre-tax losses in Future e-Commerce stood at Rs284m.
· Future Logistics raised USD10m during the year by placing a 10% stake to Li and Fung, one of the leading logistics service providers. Li and Fung has an option to further increase its stake to 26% by incremental infusion of USD20m.
· Future Generali Insurance (Life and Non-Life) businesses also added Rs340m to the losses while Future Axiom Telecom accounted for another Rs329m of losses. PRIL has scaled down business operations of Future Axiom Telecom.
Balance Sheet highlights - Consolidated
· PRIL’s consolidated balance sheet size has grown from Rs54.3bn to Rs67.5bn.
· Consolidated debt has increased from Rs27.7bn in FY08 to Rs38.6bn in FY09 with overall interest expenses rising from Rs2.2bn to Rs4.2bn.
· Total gross block has increased from Rs18.8bn to Rs25.9bn and investments have increased from Rs7.3bn to Rs9bn.
· Among the subsidiaries, Future Capital’s balance sheet size is Rs11.4bn (up from Rs9.6bn) and Home Solutions balance sheet stood at Rs8.2bn.
Valuations & view
PRIL continues to be the largest and fastest growing retailer in India with 11m sq. ft of retail space under operations and 2.5m sq. ft of retail space being added annually. Growth from here, we believe, would be more calibrated as PRIL focuses on proven and profitable formats like Big Bazaar, Food Bazaar, Pantaloons, Central and Brand Factory. While we are confident of 26%+ CAGR in revenues over FY09-11, PRIL’s efforts on inventory management (auto replenishment system, warehouse management system, SKU rightsizing, etc) would help right-size the retail balance sheet. The demerger of Future Capital and Future Generali business operations would further reduce the pressure on retail balance sheet. With Rs9bn of cash profit generation, Rs5bn from the recent fund raise and rightsizing of the balance sheet, PRIL is well placed to deleveraged its balance sheet -- this, we believe, will trigger a re-rating of PRIL’s retail business. We maintain our Outperformer call on the stock with a price target of Rs402.
SoTP based valuations
| | Basis of valuation | Entity valuations (Rs m) | Per share value (Rs) |
| Standalone retail operations | 8x EV/E FY11E | 81,548 | 418 |
| Home Solutions | Capital Employed | 1,653 | 9 |
| Future Logistics | 90% stake at value attached by Li Fung | 4,320 | 22 |
| Future Capital | 55% holding - current market cap | 8,312 | 43 |
| Other subsidiaries | Capital Employed | 6,177 | 32 |
| Total entity valuation | | 102,011 | 523 |
| Less net debt - standalone | | 23,443 | 120 |
| Equity value | | 78,568 | 402 |
IDFC - SSKI Research
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