Pantaloon Retail (I) Ltd - Monthly sales update

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1 Recommendation: Maintain BUY CMP (Cum rights) Rs1745 Target Price (Ex rights) Rs1700 Upside 11% BSE NSE PANTALOONR 52 week H/L Rs2088/506 Market Cap Face Value Rs38.4bn Rs10 Inside the report (from pg3) Pantaloon Retail (I) Ltd Investment update Shareholding pattern Shareholders % Holding Promoters 43.1 Domestic institutions 2.8 FIIS 29.5 Public and Other 24.7 Pantaloon Retail (I) Ltd - Monthly sales update Sales growth at 54% on a higher base due to last year Diwali being in November Sales growth for PRIL came down to 54% due to a higher base effect. Last year Diwali was celebrated in November 2004, while in the current year Diwali was celebrated in October. As a result, while PRIL reported a huge sales growth of 149% in October 20, sales growth was down at 54% in November 20. Every year the month following the Diwali month witnesses lower sales growth and we feel sales growth should again pickup in the coming months. Chart: Monthly sales and sales growth trend Lifestyle (Rs mn; Lhs) Value (Rs mn; Lhs) Lifestyle growth (%; Rhs) Value growth (%; Rhs) 1, ,400 1,200 1, The subsequesnt month post Diwali witnessed lower growth Jul- 04 Aug- 04 Sep- 04 Oct- 04 Nov- 04 Source: Company data, India Infoline Dec- 04 Jan- Feb- The same situation was observed in the current year as well Mar- Sales growth driven by new store openings, as same store salesremained flat Revenue growth of 54% for PRIL during November 20 was driven by new store openings, as same store growth remained flat. As earlier explained, the higher base effect of last year kept the same store growth flat with value retailing posting a negative growth of 0.8%, while lifestyle sales reported a negative growth of 3.4%. Table: PRIL November retail sales Apr- May- Jun- Jul- Aug- Sep- Oct- Nov Analyst Ashutosh Narkar anarkar@indiainfoline.com Institutional Sales Sandeepa Arora (Rs mn) Nov- Nov-04 Growth Jul-Nov Jul-Nov Growth (%) (%) Value ,890 2, Lifestyle ,493 1, Total growth 1, ,384 3, Table: PRIL November same store retail sales (Rs mn) Nov- Nov-04 Growth Jul-Nov Jul-Nov Growth (%) (%) Value (0.8) 2,895 2, Lifestyle (3.4) 1,618 1, Source: Company data Retail Sales Biren Patel December 06, 20

2 Pantaloon Retail (I) Ltd:Monthly sales update Value retailing share continues to grow PRIL s value retailing share in the total sales mix has been on the rise and it constituted 68% in November 20 and 66% on a cumulative basis since July 20. Sales mix for PRIL has been tilting towards Value retailing and we feel the company could settle at around 62-63% for the year-end. As a result operating margins for PRIL could remain under pressure. However, the company has received success with its private label business both in the value and lifestyle business and is expected to help maintain margins albeit a small drop of 5-10bps. Other major events during the month PRIL completed the implementation of SAP across its corporate office, master distribution center and back end. As are result all its processes like financial management, accounting, merchandize management, procurement and supply chain have shifted to a single platform. The company inducted three industry veterans MrVinay Shroff (Head Supply chain Management), Mr Shivam Murti (Head Food Bazaar) and Mr Rahul Bhalchandra (Head Wellness business) to head the respective departments mentioned. Mr Vinoy shroff was earlier working with reliance Infocom Ltd as Vice President Logistics. MrShivam Murti was earlier working with Great Wholesale Club as Vice President Merchandizing. Mr Rahul Bhalchandra was earlier working with Arvind Brands Ltd as Retail Head. December 06, 20

3 Recommendation: Maintain BUY CMP (Cum rights) Rs1745 Target Price Rs1700 (Ex rights) Upside 11% BSE NSE PANTALOONR 52 week H/L Rs2088/506 Market Cap Rs38.4bn Face Value Rs10 Shareholding pattern Shareholders % Holding Promoters 43.1 Domestic institutions 2.8 FIIS 29.5 Public and Other 24.7 Pantaloon Retail (I) Ltd (PRIL) recently announced its mega expansion plans. The company is expected to multiply its retail space by 5 times by 2009 and has set a revenue target of Rs90bn. The company has also ventured into home solutions segment and is expecting this segment to contribute almost 20% to its revenues by The company is also leveraging its expertise by managing three real estate venture capital funds. We continue to maintain that Pantaloon remains the best play on the Indian consumer-spending theme and maintain our BUY rating on the stock and 12-15month price target of Rs1700 (Ex rights). Mega expansion plans - intimidating other players With the revised expansion plans PRIL is expected to elevate itself far higher than its competitors in terms of retail space as well as revenues. The company is expected to multiply its retail space from the current 1.9mn sq ft to 10mn sq ft and revenue from the current Rs10bn to Rs90bn by Leveraging its retail expertise: Managing real estate and venture capital funds PRIL is raising three venture capital funds. While the domestic fund Kshitij (Rs3.5bn) is aimed at real estate investments, the international fund Horizon (US $350mn) would invest in developing real estate townships. The third fund Indivision (US $500mn) would invest in consumer companies with regional and national presence. The company has already committed 40% of the investments in Kshitij and is expected to allocate 100% by June Entering another consumer segment- home solutions Looking at the growing housing demand, PRIL through its joint venture with Unitech group is launching the home solutions business. PRIL expects to set up 2mn sq ft retail space by 2009 in this retail format and a revenue contribution of 25% to the total company revenues. Analyst Ashutosh Narkar anarkar@indiainfoline.com Institutional Sales Sandeepa Arora Retail Sales Biren Patel Strong growth outlook to sustain premium valuations PRIL continues to remain our best play on the Indian consumer-spending theme. The strong growth outlook is expected to help keep the premium valuations sustainable. PRIL is currently trading at a cum rights price of Rs1745. Our target of Rs1700 ex rights assumes subscribing to the rights issue (1:5). This implies a potential upside of 11%. Further upside is expected through its new revenue streams like AMC fees and Home solutions business, which have not been factored in our estimates. Major risks to our price target include higher than expected inventory levels, lower operating margins resulting from high value retailing share. Table: Financial summary F6/04 F6/ F6/06 F6/07 F6/08 Sales (Rs mn) 6,583 10,840 20,946 34,602 51,523 Growth (%) OPM (%) Net Profit (Rs mn) ,273 1,889 Growth (%) ROCE (%) RONW (%) EPS (Rs) PE (x) Mcap/ sales (x) Source: Company data, India Infoline estimates December 06, 20 3

4 Mega Expansion plans- Intimidating other players Pantaloon Retail unveiled its mega expansion plans at its recently concluded AGM. India s biggest retailer is planning to further increase the gap between itself and other retail players. The company has set a target of US $2bn revenues by F6/2009 on a retail space of 10mn sq ft. This translates into more than 8 times jump in turnover and more than 5 times jump in retail space. The company would have to maintain a 70% revenue growth CAGR over the next 4 years to achieve the target. Will the company be able to do so? PRIL in the past has proven itself on executing growth strategy and we feel even if the company falls short of the target by some percentage points, there could still be significant upside in the stock price. Table: PRIL retail space expansion Retail Space (Mn Sq ft) F6/ F6/09 Pantaloon Central Big Bazaar Food Bazaar Home Solutions Store Total retail Space Source: Company, India Infoline Capturing the entire consumption value chain Need Based & Entertainment Need based Individual (Shopping) Family (Shopping and entertainment) Home (Shopping, Entertainment and Home solutions) Low High Source: India Infoline Wallet share The mega expansion drive intends to capture the entire value chain of retail consumption and increase the company s share of the consumer wallet. While the company had earlier positioned itself to service the family, the company is expected to further its business proposition by venturing into home solutions. This is expected to be a big revenue driver for the company during the next few years. December 06, 20 4

5 Home solutions to be a major revenue driver from FY07 The company is foraying into the home solutions segment with joint venture with Unitech group and PRIL will hold 66.7% in the venture. The joint venture would be headed by Mr.Raghu Pillai, who was earlier the head RPG s retail business. The home solutions venture would service both the lifestyle as well as value segments. Home Solutions is expected to contribute around 25% of the revenues with a 20% share in the retail space by F6/08. We have currently not factored in the revenues from this business in our estimates. Chart: Home Solutions Model Home Furnishing & Textiles LIFESTYLE HOME TOWN Home Furniture Home Consumer Electronics VALUE Home Building Materials & Accessories Home Electrical Source: Company Home Services Home solutions delivery model The new venture home solutions will have multiple delivery formats, catering to the lifestyle as well as value segments. The company will have shop in shops in both the Big Bazaar and Central formats catering to the value and lifestyle segments respectively. In addition there would be standalone stores of around 50,000 sq ft and also big Home Town stores of approximately100, ,000 sq ft, which would house complete home solutions of both formats. Table: Home Solutions delivery models Value Shop in Shops Big Bazaars (7,000 to 10,000 sq ft per store) Lifestyle Shop in Shops Central (20,000-30,000 sq ft per store) Standalone stores 50,000 sq ft per store Home Town ,000 sq ft per store Source: Company December 06, 20 5

6 Leveraging on retailing expertise- Managing real estate venture funds PRIL s first domestic real estate fund Kshitij closed with a Rs3.5bn corpus of which 40% of the corpus has already been committed. The company is in the process of raising another US $350mn through its second fund-offering Horizon for international investors by Jan The company also plans to raise another fund named Indivision with a corpus of US$400mn and a green shoe option of another US $100mn for investing in consumer goods companies. The company would earn asset management fees (2.5% on Kshitij and around 2% on the other two international funds) on the invested corpus of these funds and a share of profits the tune of 20% over the hurdle rate of 8%. Kshitij (Real Estate VC Fund) Corpus: Rs3.5bn The fund would be managed through PHF Investment Advisory Company Ltd, which is a 76% subsidiary of PRIL. The company has already committed around 40% of the total corpus and is expected to commit close to 60% of the corpus by end March and 100% by end June The former CEO of INOX Leisure and Entertainment, Mr Shishir Baijal heads the company. The company is expected to develop around 5mn sq ft land with a total project cost of Rs15bn. Horizon International Fund, Corpus: US $350mn The second real estate fund is expected to close in January The fund envisages development of 50,000 sq mts or 25 acres of land as Market Cities, which would essentially be within city limits. The planning has been done by US based Callison group, which is one of the big architecture firm. The first two market cities have been conceptualized around large water spaces like lakes etc, which would be a complete destination for shopping, leisure, entertainment and recreational needs. The plan would also include convention Centers, 3-4 Star Hotels, service apartments, commercial offices and residential apartments and community centers like parks Indivision Capital Fund, Corpus: US $500mn The former CEO of Coke India, Mr.Sanjiv Gupta, would head the fund operations. The consumer fund would primarily look at investing in small consumer servicing companies. The investment model is based on mentor capital private equity model. The fund would use strong relationships to attract and hire strong management to complement existing management. The fund intends to develop regional brands into national brands through Pantaloon s delivery formats. While we have not factored in the revenues from the Venture Fund initiative into our earnings model, we estimate that the venture could contribute revenues to the tune of Rs144mn in F6/07 and Rs300mn from F6/08, based on AMC fees. This could translate into an EPS accretion of Rs5.5 in F6/07 and Rs11.8 in F6/08 consolidated EPS. There could be further upside from profit sharing over the hurdle rate. December 06, 20 6

7 Value retailing share expected to grow further Over the last two years apart from Central, there has been little addition to the lifestyle retail space. Lifestyle retailing space addition as a proportion to value retail format has been at 68% (2004) and 63% (20). This has resulted in value retailing share going up from 32% in 2003 to 57% in 20. While the company is expected to increase its lifestyle addition over the next few years, we expect the company to settle at a value-retailing share of around 60-62%. Our estimates factor in a faster retail space addition in the Central formats in However rapidly growing food-retailing business should keep the value revenue share high. Table: Sales mix trend F6/03 F6/04 F6/ F6/06 F6/07 F6/08 Sales mix (%) Lifestyle Value Others Source: Company data Increase in private labels should help maintain operating margins With all of the company s business segments in both the value and lifestyle segments attaining critical mass, the company has been able to increase its focus on introducing private labels. The scale of business has helped the company make the private label business viable and also reduce margin pressure. The company has introduced various private label programs including a plus size label called ALL. The company has also launched watches and sunglasses line named Blue Sky, which includes both branded and private labels. Big Bazaar has a high revenue share coming in from the fashion segment. This segment accounts for almost 45% of the turnover out of which 40% is contributed by private labels. The company has also launched various private labels in the food segment, which would help improve Food Bazaar margins from the current year. We expect the company to benefit significantly from the private label initiative, which would help maintain operating margins at the current levels despite growth in the value retailing revenue share. Chart: Operating margin Operating Margin (percentage) F6/01 F6/02 F6/03 F6/04 F6/ F6/06E F6/07E F6/08E Source: Company data, India Infoline estimates December 06, 20 7

8 ROCE improvement in life lifestyle retailing due to Central malls Strong growth in Central malls has helped improve return on capital employed for PRIL. Inventory valuation for Central is done on a different basis. While both Central and the respective brands book sales, Central books cost of goods sold (COGS) in line with margins decided. However, it does not book inventory on its books on the goods invoiced by other brands. As a result although sales are reflected in the company s books, corresponding inventory does not. Second the company s investment in Central Malls has been coming down as the company is now entering in wet leases leading to the company saving on capex investment. This would result in the company paying a higher lease rental and lower capex spending. This has helped Lifestyle retailing improve its capital employed from 22% in F6/04 to 29% in F6/. Table: Central Inventory valuation* Retail space(%) Sales (%) Inventory(%) Private labels 30% 30% 30% Branded labels 50% 50% NIL Food courts 20% 20% NIL Total 100% 100% 30% Source: Company data, India Infoline estimates * Sales have been assumed in line with floor space, this would ideally differ depending on the retailing format like apparel or food. However, it serves our purpose to understand Central inventory valuation December 06, 20 8

9 High inventory still a concern PRIL s inventory levels have been under the scanner for high inventory levels. Inventory days in F6/ have risen from 87days to 93 days. Ideally with PRIL s business mix tilting more towards value retailing, inventory days should have come down as food retailing has higher stock turns. Also as earlier mentioned Central Malls contribute lower towards inventory accretion. However, PRIL has been expanding its retail space at a much faster pace than its competitors and as a result inventory accretion at the year-end would be more dependent on operational retail space and not just inventory days. As a result we have compared PRIL to its other peers in terms of inventory per sq ft. Chart: Inventory level trend 2,500 2,000 1,500 1, Inventory per sq ft 965 1, ,089 2,039 1,650 1, Inventory days Shopperstop Trent PRIL - Shopperstop Trent PRIL Source: Company data, India Infoline estimates However, here too PRIL has a high inventory per sq ft of Rs1426 as compared to Rs1089 for Trent and Rs965 for Shopper s Stop. While the ratio is already high compared to its peers, it shoots up further to Rs1,718 in 20 if we were to factor the inventory contribution from Centrals only for proportionate space (only for space occupied by private label brands owned by PRIL). While the overall inventory levels for PRIL are high we feel there are some reasons for PRIL s high inventory. First, its inventory valuation policy where PRIL values it finished goods inventory which forms 90% of the total closing inventory at retail price less a mark, while all other retail players value it at lower of the cost or realizable value. Change in practice could have an impact on the company s gross margins. Second, unlike its other peers, Pantaloon has manufacturing facilities. Some inventory would always remain tied up in these facilities and would reflect on its books. In the event of inventory write offs, which have not been factored in our estimates, the company could suffer an impact on its profitability. The only positive point remains, that inventory per sq ft has been coming down consistently and could come down further in the future. December 06, 20 9

10 Company should be able to sustain premium valuations We expect the company to continue to receive premium valuations.our assumption is absed on PRIL s long-term growth prospects, strong current revenue growth in both same store sales and new store sales, market leadership in organized retailing and sustainable operating margins. Also higher contribution from value retailing lends stability to revenue streams. Our estimates do not factor in the upside from the home solutions business and the asset management fees and return on VC funds. PRIL is currently trading at a cum rights price of Rs1745. Our target of Rs1700 ex rights assumes subscribing to the rights issue (1:5). This implies a potential upside of 11%. Upside to our target price include AMC fees accruing to the company since F6/07 and the Home solutions business. Downside to our target price include lower than expected revenue growth resulting in lower profitability and drop in operating margins either due to pressure from growing value retailing business or inventory write offs. Possibility of further upside potential from the home solutions business PRIL s home solutions business is expected to begin its full-fledged operations from June As a result we will be able to see the impact of this segment only in We have currently not factored in any revenues from this business in our estimates. The company would be able to realize the full potential of this business only over the next 2-3 years. As a result we advise investors to stay invested in the stock to play the Indian consumer-spending theme. December 06, 20 10

11 Financials Income Statement F6/04 F6/E F6/06E F6/07E F6/08E (12) (12) (12) (12) (12) Sales 6,583 10,840 20,946 34,602 51,523 Growth Operating Expenses (6,025) (9,974) (19,278) (31,854) (47,448) Operating Profit ,669 2,748 4,075 Growth Other Income EBITDA ,719 2,788 4,115 Growth Depreciation (88) (133) (236) (393) (527) EBIT ,483 2,395 3,588 Interest (239) (244) (343) (495) (769) Profit Before Tax ,139 1,900 2,819 Tax (46) (146) (376) (627) (930) Profit After Tax ,273 1,889 Balance sheet F6/04 F6/ F6/06E F6/07E F6/08E (12) (12) (12) (12) (12) Sources Share Capital Reserves 758 1,995 4,869 6,142 8,030 Net Worth 949 2,215 5,133 6,406 8,294 Loan Funds 2,366 2,862 4,162 7,162 9,462 Def Tax liability Total 3,376 5,208 9,425 13,698 17,887 Uses Gross Block 1,847 2,511 4,108 6,462 8,481 Accd Depreciation (243) (374) (610) (1,003) (1,530) Net Block 1,604 2,137 3,498 5,459 6,952 Capital WIP Total Fixed Assets 1,748 2,295 3,648 5,609 7,102 Investments ,019 1,069 Total Current Assets 2,300 4,039 7,265 10,996 15,511 Total Current Liabilities (729) (1,448) (2,408) (3,925) (5,795) Net Working Capital 1,571 2,591 4,856 7,070 9,716 Miscellaneous expenditure Total 3,376 5,208 9,425 13,698 17,887 December 06, 20 11

12 Important Ratio F6/04 F6/ F6/06E F6/07E F6/08E (12) (12) (12) (12) (12) Per share ratios EPS (Rs) Div per share Book value per share Valuation ratios P/E P/BV EV/sales EV/ PBIT EV/PBIDT Profitability ratios OPM (%) PAT % ROCE RONW Liquidity ratios Current ratio Debtors days Inventory days Creditors days Leverage ratios Debt / Equity December 06, 20 12

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