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Pantaloon Retail Ltd (updated - 30 Sept 2009)
That Pantaloon has tempered the pace of growth and now wants to pursue a strategy whereby it earns a better return on investments is a good thing. Analysts point out that the return on capital employed in the retail business improved to 18.6 per cent in the year to June 2009 from 17.7 per cent in the previous year.

The scarcity as well as the high cost of capital had already forced the retailer to scale back its plans — compared with the 2.8 million sq feet that it added in 2007-08, Pantaloon added just 1.8 million sq feet in 2008-09. With rentals coming off and the capital per sq ft expected to be lower due to better inventory management and right-sizing of stores, Pantaloon is now looking to add around 2.5-3 million sq feet every year in the next three years.

However, this sounds a tad ambitious as it will require at least Rs 3,500 crore of capital and Pantaloon’s balance sheet is highly leveraged with a debt of Rs 2,850 crore at the end of June. The company is hoping to deleverage the balance sheet by roping in a strategic investor and raising Rs 1,000 crore. Only if that happens can Pantaloon hope to achieve its targets.

Nevertheless, with the economy recovering, the retailer should grow faster than it did in the first six months of 2009, when revenues increased by 25.6 per cent to Rs 6,342 crore (standalone). The growth in same store sales (SSS) for the value retailing business slowed to 7.4 per cent while that for the lifestyle retailing piece was just 6 per cent. With the value retailing growing faster and now fetching almost 72 per cent of the revenues, gross margins contracted by 30 basis points.

However, efforts to contain costs helped the retailer post better operating margins of 10.5 per cent, up 140 basis points, which pushed up the operating profit by 46 per cent. The net profit, however, grew just 13 per cent because of high interest costs.

With a wide range of formats and the aggression to build sale, Pantaloon is well-poised to cash in on the rising consumer spends in organised retail chains. Taking into account the value of the subsidiaries, IDFC SSKI attributes a sum-of-theparts value of Rs 408 to the stock, which currently trades at Rs 343.
source - BS

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Pantaloon Retail Ltd (updated - 19 Nov 2009)
Pantaloon Retail’s attempts to restructure itself should pay off. Transferring Big Bazaar and Food Bazaar, which fetch 70 per cent of the firm’s revenues, to a 100 per cent subsidiary allows for more participation by foreign investors and offers a pure discount retailing play when listed.

Besides, value can also be created for shareholders through a strategic tie-up with a foreign player. A partnership with an international food retailer, for instance, would help increase sales of the segment. That apart, the financial businesses — insurance and Future Capital — which require capital, need not depend on the parent firm since they are to be spun off into a separate subsidiary.

The other smaller businesses of IT, brand development and learning have been carved out for a consideration of Rs 190 crore. Pantaloon needs to deleverage its balance sheet —the net debt is close to Rs 3,800 crore with the debt to equity ratio at 1.2 times.

The management aims to bring this down to 0.8 times and strengthen the balance sheet which is welcome. The high level of borrowing is hurting the retailer’s growth plans. Meanwhile, business wasn’t too brisk in the September 2009 quarter and at Rs 1,780 crore in the September 2009 quarter, revenues rose just 18 per cent year-on-year. That was disappointing since the June 2009 quarter had seen revenues go up 20 per cent.

Same store sales for lifestyle retail rose 11 per cent even though the quarter coincided with a part of the festive season. Operating profit margins improved 50 basis points to 10.7 per cent, helped by some savings on expenses on employees, though they fell sequentially by 30 basis points.

Lower interest costs helped Pantaloon report a rise in the net profit of 21 per cent. Although the retailer wasn’t able to add too much space during the quarter, it remains the biggest listed player with space of close to 10 million sq ft and is well poised to cash in on the recovery in the economy.

Already, same store sales have improved in October. The Pantaloon stock rose 6 per cent to Rs 342 on Wednesday with the street encouraged by the restructuring plans. Analysts estimate a sum of the parts valuation of Rs 408 for the stock.
source - BS