BSE SENSEX S&P CNX 17,773 5,390 Bloomberg PF IN Equity Shares (m) 217.1 52-Week Range (INR) 364/125 1,6,12 Rel. Perf. (%) 9/-49/-29 M.Cap. (Rs b) 38.4 M.Cap. (US$ b) 0.8 14 February 2012 2QFY12 Results Update Sector: Retail CMP: INR177 TP: INR192 Neutral PAT down 71%; Weak SSS growth, sharp increase in debt increases business risk; Neutral 2QFY12 results are below estimates with core retail PAT down 71% YoY to INR135m. Although EBITDA rose 9.6% led by 40bp margin expansion, 47% higher interest burden and 35% higher depreciation impacted PAT. SSS growth in Value retail declined to 3% and Lifestyle segments to 5%; Home retailing SSS declined to 3.2%. PF has reported expansion in both gross and EBIDTA margins across standalone and FVRL which show the benefit of cost cutting measures like store closures (est 0.4m sq ft during the quarter, 3BB and FB, 1 Pantaloons) and employee productivity. We estimate that gross core retail debt of PF has increased from INR48b in June2011 to INR57b; standalone debt has increased INR6.5b while FVRL has seen an increase of INR2.5b. We see little scope of any reduction in interest cost without significant equity capital infusion or fund raising through stake sale in financial services and other non-core businesses. We believe management target of INR20b debt reduction in 12-18 months is highly optimistic. We are reducing JY12 and JY13 estimates by 33% and 22% mainly due to 14% and 8% increase in interest cost. We have factored in ~INR3b increase in JY12 debt from Dec-2011 levels. For JY13, we are factoring in 100bp decline in interest rates and INR4.7b increase in debt. Our estimates don't factor in any reduction in debt due to sale of non-core assets. The stock trades at 33x JY12 and 23.3x JY13 EPS estimates of INR5.4 and INR7.6. We are Neutral on the stock. Amnish Aggarwal (AmnishAggarwal@MotilalOswal.com); Tel:+9122 3982 5404
Highlights of 2QJY12 results concall of Consumer demand: Current discount season has seen sharp increase in sales in January due to pent up demand; however, February has not been that great. PF plans to start its "Purana Do Naya Lo" offer from February 15 to improve sales growth. Store additions to decline: PF has indicated lower store additions and is looking at very few new bookings of properties. The company will review its strategy of space addition post 3QJY12. PF has been undertaking refurbishment of Big Bazaar and Pantaloon stores and is also looking at rationalization of store area to align it in line with the demand. PF will avoid cannibalizing own stores in future; in addition, it is also adding Home Town Express stores which will act on hub and spoke model. Cost cutting and operational efficiency: PF has effectively reduced headcount by ~3,000 by shifting manpower from one store to another and not replacing people on the front end, which has high attrition rate. The company is also looking at creating efficiency at head office level the benefits of which will be reflected in coming quarters. Fashion to generate EBITDA of INR7.5b in JY13: PF remains positive on fashion segment under various formats like FBB, Pantaloon and Central. It aims at an EBITDA of INR7.5b in JY13. PF has started a distribution centre in Nagpur for fashion segment which will reduce the working capital requirement. Management denied having any unusually high dead inventory in fashion segment due to robust write off mechanism. Food segment share to double: PF plans to increase the share of fresh food in total sales from current 5-6% (INR4-5b) to 10% in the coming 12 months. PF has already launched Aadhar as a rural cash and carry store which has evoked good response. It has started 12 farm collection centers for procurement and grading of fresh food. Home Retailing: Management is confident about the potential of this segment which has seen two downturns since inception. It has launched Home Town Express on hub and spoke model, and is restructuring EZone to reduce inventory and costs. Electronics remains a challenge area due to rapid change in technology. Estimated core retail debt at INR57b; aims for INR20b reduction: Although management has not shared the specific debt figure as on Dec-2011, we estimate the same at INR57b on gross basis (including CCD). PF plans to reduce debt by INR20b over the next 12-18 months by stake sale in financial services and other non-core assets. Part of this divestment is likely to happen by the end of JY2012. Inventory levels to decline from current levels: Management stated that inventory has increased due to increase in product prices, lower offtake due to poor consumer demand and some buildup before the discount season. Inventory levels have come off from Dec highs, although it has not given any specific target for reduction in the same. 14 February 2012 2
2QFY12 PAT down 71%, both FVRL and Standalone PAT impacted by lower SSS growth and higher interest Core retail: Sales increased 4.9% YoY to INR28.9b (est INR30.9b), EBITDA increased 9.6% to INR2.6b (est INR2.7b) as margins expanded 40bp YoY to 9% (est 8.6%). 47% increase in interest cost to INR1.6b (higher rates and increase in debt) and 35% increase in depreciation resulted in 71.4% decline in Adj PAT despite 310bp decline in tax rate. Standalone: Standalone sales are up 8.2%, gross and EBIDTA margins have increased 110bp and 90bp respectively. EBIDTA is up 17%, however 60% increase in interest burden and 37% in depreciation have ensured 72% PAT decline despite decline in tax rate by 800bp. We believe margin expansion was aided by full benefit of ~16% price increase effected during 4QFY11. Value retailing: Value retailing has reported muted 2.9% increase in sales and 3.3% increase in EBIDTA as margins were flat at 7.6%. 37% higher interest and 32% higher depreciation led to 71% decline in PAT. Revenue growth moderates; PAT impacted by interest costs (INR m) 1QFY11 2QFY11 3QFY11 4QFY11 1QFY12 2QFY12 Chg. (%) Core Retail Sales 25,814 27,586 28,119 28,604 29,106 28,933 4.9 Gross Profit 7,416 7,933 8,055 8,444 8,496 8,492 7.0 Gross Margin (%) 28.7 28.8 28.6 29.5 29.2 29.4 EBITDA 2,127 2,383 2,479 2,612 2,523 2,612 9.6 EBITDA Margin (%) 8.2 8.6 8.8 9.1 8.7 9.0 Interest 933 1078 1096 1179 1305 1582 46.8 Adjusted PAT 428 472 505 473 330 135-71.4 PAT Margin (%) 1.7 1.7 1.8 1.7 1.1 0.5 Standalone Sales 9,915 10,243 10,320 10,497 10,784 11,080 8.2 Gross Profit 3,459 3,602 3,606 3,812 3,910 4,019 11.6 Gross Margin (%) 34.9 35.2 34.9 36.3 36.3 36.3 EBITDA 958 1,074 1,117 1,189 1,198 1,259 17.3 EBITDA Margin (%) 9.7 10.5 10.8 11.3 11.1 11.4 Interest 420 462 484 526 657 736 59.5 Adjusted PAT 176 199 201 170 124 56-71.7 PAT Margin (%) 1.8 1.9 1.9 1.6 1.2 0.5 Future Value Retail Sales 15,899 17,343 17,799 18,107 18,322 17,854 2.9 Gross Profit 3,957 4,332 4,449 4,633 4,585 4,473 3.3 Gross Margin (%) 24.9 25.0 25.0 25.6 25.0 25.1 EBITDA 1,169 1,310 1,362 1,423 1,325 1,353 3.3 EBITDA Margin (%) 7.4 7.6 7.7 7.9 7.2 7.6 Interest 513 616 612 653 648 846 37.2 Adjusted PAT 252 273 304 303 206 79-71.3 PAT Margin (%) 1.6 1.6 1.7 1.7 1.1 0.4 Source: Company/MOSL 14 February 2012 3
SSS growth marginally weaker due to poor consumer sentiment; Home retail sales decline 3.2% PF reported SSS growth of 3.2% in value retailing (3.6% in 1QFY12) and 5.3% in lifestyle retailing (6.5% in 1QFY12) which was led by ~16% increase in apparel prices. Home retailing SSS declined 3.2% (1.3% growth in 4QFY11). SSS growth in value retailing is one of the lowest posted by PF; we estimate SS volume decline across formats. However, despite the weak consumer sentiment in December quarter, the growth is only marginally lower than Sept quarter which is a positive. We estimate large discounting in Value retail as sales have grown in line with SSS growth for the format. The early sale in January to increase footfalls, sales and inventory-turn has worked, with the month producing strong sales turnover. PF expects apparel prices to fall due to lower cotton prices; this coupled with improving consumer sentiment should improve SSS growth in coming quarters. Electronics and Home retailing continues to drag sales growth and profitability of the company. PF has decided to focus on top 5 cities and gradually aim for top position in these cities and later try to scale up the business. Value and lifestyle SSS growth at 2009 lows Home retailing SSS growth declines 3.2% Source: Company/MOSL Net area addition of ~0.62msf takes total area under operation to 16.3msf; store closures likely to accelerate PF has added another 0.62m sq ft of retail space (net) taking the total to 16.3m sq ft. 11 Big Bazaar stores were opened during the quarter and 3 closed. Net addition of Pantaloon stores was 5, Central 3, Home Town 1, and KB Fair Price 3. Besides, 24 Home Town Express stores were also opened. PF has closed 1 Pantaloons, 3 Big Bazaar and 3 Food Bazaar stores during the quarter. We expect store openings to get skewed more and more towards Tier II and Tier III cities to gain first mover advantage. We note that emerging players like Hypercity, More, Bharti and Star India Bazaar have aggressive store opening plans over the coming 2-3 years. We expect store closures to increase further if low SSS growth persists in coming quarters as well. 14 February 2012 4
0.62m sq ft of net space addition; store closures accelerating Key Retail Matrics 4QFY10 1QFY11 2QFY11 3QFY11 4QFY11 1QFY12 2QFY12 Retail Space (m sq ft) Big Bazaar 6.9 7.0 7.4 7.6 7.6 7.6 7.9 Central 2.2 2.2 2.4 2.5 2.6 2.8 3.0 Pantaloons 1.2 1.3 1.5 1.5 1.7 1.8 1.9 Home Town 1.0 1.1 1.1 1.2 1.2 1.2 1.2 E Zone 0.5 0.5 0.5 0.5 0.5 0.4 0.4 Food Bazaar 0.5 0.5 0.5 0.5 0.6 0.5 0.5 KB's Fair Price 0.1 0.1 0.2 0.2 0.2 0.2 0.2 Others 0.9 0.7 0.7 0.8 0.9 1.1 1.2 Total 13.3 13.4 14.2 14.8 15.2 15.7 16.3 Store Count (x) Big Bazaar 132 136 143 148 149 149 157 Central 25 27 29 30 32 35 38 Pantaloons 48 48 53 54 59 59 64 Home Town 11 11 11 12 12 14 15 E Zone 36 42 43 44 42 36 36 Food Bazaar 53 55 54 56 56 49 47 KB's Fair Price 123 134 170 198 214 221 224 Net Store Addition (x) Big Bazaar 7 4 7 5 1 0 8 Central 0 2 2 1 2 3 3 Pantaloons 2 0 5 1 5 0 5 Home Town 3 0 0 1 0 2 1 E Zone -1 6 1 1-2 -6 0 Food Bazaar -1 2-1 2 0-7 -2 KB's Fair Price -43 11 36 28 16 7 3 Source: Company/MOSL Cutting estimates by 22-33% on higher interest costs; debt reduction and exit from non-core businesses key monitorables; Neutral SSS growth seems to have bottomed out in 2Q, but sustenance of growth post discount period of Jan/Feb 2012 needs to be watched out. We estimate that gross core retail debt of PF has increased from INR48b in June2011 to INR57b; standalone debt has increased INR6.5b while FVRL has seen an increase of INR2.5b. We see little scope of any reduction in interest cost without significant equity capital infusion or fund raising through stake sale in financial services and other non-core businesses. We believe management target of INR20b debt reduction in 12-18 months is highly optimistic. PF has been able to demonstrate strong margins due to cost cutting in manpower and overheads, benefits of which will flow to the bottom-line in coming quarters as well. We have increased EBITDA margin estimates of core retail by 10-30bp for JY12 and JY13 to factor in these gains. We are reducing JY12 and JY13 estimates by 33% and 22% mainly due to 14% and 8% increase in interest cost. We have factored in ~INR3b increase in JY12 debt from Dec-2011 levels. For JY13, we are factoring in 100bp decline in interest rates and INR4.7b increase in debt. Our estimates don't factor in any reduction in debt due to sale of non-core assets. The stock trades at 33x JY12 and 23.3x JY13 EPS estimates of INR5.4 and INR7.6. We are Neutral on the stock. 14 February 2012 5
: an investment profile Company description is the largest organized retailer in India, with a retail space of more than 14msf under its belt. It has presence in multiple categories through different formats like department stores (Pantaloon), hypermarkets (Big Bazaar), seamless mall (Central) and standalone stores. Key investment arguments PF is the best play in the fast growing organized retail industry, with presence across categories and formats. The company houses ~14msf of retail space and enjoys a significant first mover advantage. Management has guided increasing share of private labels so as to improve the company's margin profile. Key investment risks Pantaloon has an aggressive expansion plan. Timely and profitable execution is a critical issue, more so in case of Pantaloon. Pantaloon has a leveraged balance sheet (D/E of ~1.1x), which limits the possibility of further borrowings. We believe our area addition assumption would be under risk if cash flow generation does not materialize. The company continues to invest in non-retail subsidiaries. We believe recent efforts to hive off Comparative valuations Pantaloon Titan Shoppers Stop P/E (x) FY12E 33.0 29.3 28.5 FY13E 23.3 23.0 21.3 EV/EBITDA (x) FY12E 7.4 20.3 13.9 FY13E 6.5 16.0 10.5 EV/Sales (x) FY12E 0.7 2.1 1.3 FY13E 0.6 1.7 1.0 P/BV (x) FY12E 1.3 12.1 4.5 FY13E 1.2 8.9 3.9 non-retail subsidiaries augur well and will help make Pantaloon a pure retail play. Recent developments Pantaloon reported SSS growth of 3.2% in Value Retailing and 5.3% in Lifestyle Retailing. The company added 0.62msf of retail space in the March quarter, adding 5 Pantaloons, 3 Central, 8 Big Bazaar, and 3 KB's Fair Price stores. Valuation and view The stock trades at 33x JY12 and 23.3x JY13 EPS estimates of INR5.4 and INR7.6. We are Neutral on the stock. Sector view We are positive on the sector post the revival in consumption sentiment. Area addition is likely to pick up in the coming quarter, though we note that companies are approaching space addition in a more calibrated manner. Players like, with a strong hypermarket format and presence in larger number of categories are likely to be major beneficiaries. Longer term prospects are bright, given rising incomes and low penetration. EPS: MOSL forecast v/s consensus (INR) MOSL Consensus Variation Forecast Forecast (%) FY12 5.4 6.6-19.2 FY13 7.6 8.9-14.7 Target price and recommendation Current Target Upside Reco. Price (Rs) Price (INR) (%) 177 192 8.7 Neutral Stock performance (1 year) 380 Sensex - Rebased Shareholding pattern (%) Dec-11 Sep-11 Dec-10 Promoter 44.7 43.7 44.8 Domestic Inst 17.3 20.0 18.3 Foreign 23.5 23.6 24.4 Others 14.5 12.7 12.5 310 240 170 100 Feb-11 May-11 Aug-11 Nov-11 Feb-12 14 February 2012 6
Financials and valuations 14 February 2012 7
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