On rejig road

The stock of Pantaloon Retail India has outperformed broader markets in the last one month, appreciating 24% as against the 11.5% rise in the BSE Sensex. At Rs 364.20, the stock trades at 31 times its estimated earnings for 2010.

Analysts are positive on Pantaloon, which is currently restructuring its business. The company would restructure its business along three verticals. Big Bazaar and Food Bazaar would be transferred into 100% subsidiaries, making Pantaloon a pure retail play. Hiving off Big Bazaar is likely to allow efficient use of capital and provide greater flexibility to expand retail operations. Secondly, non-retail businesses like Future Brands and Future Knowledge Services would be transferred into a separate company. Thirdly, there would be value unlocking in the financial services business, which includes Future Capital.

Economic slowdown had impacted Pantaloon’s same store sales growth in FY2009. The company added 1.8 million square feet (msf) of retail space last fiscal and had 9.7 msf of retail space under operations as of June 2009. It is expected to add about 4.6 msf of retail space over FY2009-11.

An improving economy augurs well for consumption-driven companies such as Pantaloon.
The company posted a strong operating performance in the September quarter. Operating margins expanded 45 basis points (100 basis points make one percentage point) year on year to 10.7%, riding on higher contribution from higher margin lifestyle stores. Lower footfalls, mainly due to swine flu scare and floods in some parts of the country, impacted revenues, which increased 17.6%. Net profit increased 21%, helped by lower tax rate and strong operating performance.

Bhushan Gajaria of IDFC-SSKI feels the demerger of Future Capital and Future Generali operations will reduce the pressure on Pantaloon’s retail balance sheet. “With Rs 900 crore of cash profit generation, Rs 500 crore from the recent fund raise and rightsizing of the balance sheet, Pantaloon is well placed to de-leverage its balance sheet —- this, we believe, will trigger a re-rating of Pantaloon’s retail business. Investors could consider the stock on declines.