Monday, January 17, 2011

Pantaloon Retail Buy on Dips !


Rising consumption, reflected in higher same store sales, focus on core retail operations and attractive valuations should help the stock deliver 30 per cent over 18 months, say analysts.

While Pantaloon Retail's stock delivered negative returns in 2010 (down 13.6 per cent) as compared to the Sensex's 17 per cent, this trend should change soon for the better. Analysts believe the current restructuring exercise to focus on retail, streamlining of operations and strong growth should help the stock generate about 30 per cent returns over the next 18 months. India's largest listed retailer, Pantaloon, is expected to record a sales growth of 20-25 per cent over the next two years on the back of aggressive expansion as well as a robust same store sales growth. The company is also planning to team up with Carrefour, the world's second largest retailer after Walmart, to set up the latter's branded stores in India. The tie-up would assume importance when foreign direct investment (FDI) in multi brand retail is allowed as it will give the company an opportunity to divest a part of its stake in the retail business in favour of a foreign player.

Expansion, sales growth, profitability
The company which currently operates about 16 million square feet of space is expected to add about 1.5 million to 2 million square feet of retailing space annually over the next two years. On the back of capacity addition as well as strong same store sales growth across formats (value, lifestyle and home), the company expects to grow its sales by 25-30 per cent in 2010-11. Good growth, especially in the lifestyle brands which have Ebitda margins of 12-13 per cent as compared to value brands which command half of that, higher private label (own brands) sales as well as benefits of scale should keep margins stable going ahead even as the company invests in expanding its reach. Further, its plans to improve inventory turnover (inventory forms 60 per cent of its current assets) will lead to lower working capital requirements and dependence on debt to fund operations. Part of this inventory reduction (inventory outstanding days are expected to be reduced by 30 per cent over the next 2-3 years, says an Antique Stock Broking report) is likely to come from the company's increased focus on food items. The sales cycle for these products, which are expected to contribute to 50 per cent of the sales over the next five years compared to 35 per cent currently, is shorter.

Restructuring Pantaloon Retail has been undertaking a number of steps to renew its focus on its core retail operations which comprise value and lifestyle segments. The company has already demerged its mall management business into a separate company, Future Mall Management, which will manage its property leasing and food services business. Further, the company plans to restructure its financial services businesses by consolidating Future Capital Holdings (a listed company) and the insurance business into a single entity, which should help it to free up funds for its core retail operations. Analysts believe the restructuring process will be completed by 2011-12, and should rub off positively on the stock valuations.

Outlook
The completion of the restructuring process and the company's focus on its core retail operations will help it improve the cash flow and profits. The concern area will continue to be its home business, which posted a loss of Rs 12 crore on revenues of Rs 200 crore in the September quarter. The company says it has received orders from institutional customers and combined with the growth in retail business should translate into higher sales over the next few quarters. Further, the Ebitda margins, which fell 120 basis points year-on-year in the September quarter to 8.2 per cent, are expected to stabilise in the December quarter which would see the full impact of the festival season. At Rs 332, based on the 2011-12 numbers, the stock is trading at an attractive 17 times the earnings. Even on a price to book value basis, valuations at 2.15 times are also lower than the historical four times.

While Edelweiss Securities has a 'buy' rating on the stock, UBS and Antique Broking have targets ranging Rs 473-600.

We recommend a buy on the scrip below Rs.300 and hold for a 12-18 months period for a target price of 450


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