Analysts optimistic about Pantaloon’s growth

The stock of Pantaloon Retail– India’s leading retailer that operates multiple retail formats in both the value and lifestyle segment - is down 24 per cent since the start of the year over fears that rising interest rates and inflation could impact its

margins and sales. Despite the under performance, most analysts have a buy rating on the stock. They believe the company is likely to sustain a strong double-digit same-store sales growth across verticals and is attractively valued.

Analysts at Religare Capital Markets believe the company’s efforts to focus on core retail operations, improvement in working capital efficiency and consequently lower capital deployment could generate value for investors. Rising same-store sales growth, retail focus and operational improvements should help the company post robust revenues. It increased prices by 12 to15 per cent from March this year, which could impact sales growth, feels analysts at Motilal Oswal. Further, the imposition of excise duty on branded apparel can impact sales growth in the high margin apparel segment in the coming quarters. Thus, sales growth increase in the next few months is something that remains to be seen. Kishore Biyani, MD, Pantaloon Retail and CEO, Future Groupis optimistic as he says, “We would be looking at space growth of 2.5-3 million sq. ft. and revenues growth of around 30-40 per cent. One can think of more growth, but the way demand exists, it’s all about the infrastructure and resources. Growth of 30-35 per cent is visible.”

A key concern of the market has been the company’s stakes and investments in unrelated subsidiaries. However, with focus on core-retail operations, plans to list some subsidiaries and get new partners should help bring down the incremental capital deployed in subsidiaries. The company is likely to look at a moderate expansion of about 2 million sq. ft. every year, lower than the previous years.

The company had EBDITA margins of 9.2 per cent in 2009-10 and is likely to end 2010-11 at about 8.8 per cent. According to analysts, margins are likely to drop to anywhere from 8 to 8.5, due to higher contribution from the value retail business. Unlike its lifestyle business (Pantaloon, Central), which fetches EBDITA margins upwards of 15 per cent, the value segment (Big Bazaar, Food Bazaar) earns single-digit margins. The company is likely to counter a further increase of prices by raising product rates as well as focusing on faster same-store sales growth. However, if product prices continue to rise, it is likely to impact demand, especially discretionary spending on the likes of apparels and home décor, as was the case in 2008-09. A sharp rise in prices will also impact the value category that generates over 60 per cent of the company’s revenues. While rising interest costs are a worry, they are likely to trend down from an estimated 3.8 per cent of sales in 2010-11 to about 3.2 per cent in 2012-13, according to the analysts at Religare. This coupled with a strong top-line growth are likely to drive earnings for the core retail business by 27.6 per cent for the period FY 2011-12. Biyani adds, “Our debt equity ratio is around 1:1.1 and average maturity of our debt is around three-and-a-half-years. It’s about having a villain in every story and the interest or debt is a villain in our story. We are quite comfortable on that. Dilution is always an option, but a right balance of equity and debt is the right option for our growth. This is what we are pursuing.”

Pantaloon Retail is headquartered in Mumbai and operates over 16 million sq. ft. of retail space. It has over 1,000 stores in 73 cities and employs over 30,000 people.