Analysts covering the retail sector are neither clear on the structure of the Pantaloon Retail deal nor on the impact it will have on the company’s profitability. Initial research reports from brokerages are all based on assumptions as the details provided by the company are not enough. In any case, the sale of a profitable ‘flagship’ division highlights the fact that Pantaloon has not been able to sell stake in Future Capital, and the financial stress the company is in.
The deal seems to be profit neutral as the benefit Pantaloon will be getting by reduction of debt will be taken away by a drop in profitability of the retail format store. Analysts are of the view that these stores account for sales of around Rs 1,600 crore, which is derived by utilising 2.05 million sq ft of space. An earnings before interest depreciation and tax (EBIDTA) margin of 11-12 per cent has been assumed by analysts, which is equivalent to around Rs 192 crore of operating profit.
Pantaloon will be saving around Rs 1,600 crore in debt, which has been assumed to carry an interest of 12 percent. The company will thus be saving around Rs 192 crore in interest cost, which is equal to the contribution of operating profit from the division.
The capital structure of the new entity to be formed is not very clear, and nor is the pricing. Through an Aditya Birla Nuvo press release says that the company will hold a minimum of 50.01 per cent, after conversion of the Rs 800 crore of debenture and a subsequent open offer, it is clear that Pantaloon will have a minority stake and lesser say in the business.
Assuming that Pantaloon Retail maintains its equity structure, servicing the equity will be an issue. The company will have lesser profits to be distributed to its shareholders, in other words its earnings per share (EPS) will come down. Reduction of debt, will improve its debt-equity ratio though.
Further clarity on the impact of the division sale will come only after the company announces its results after the approval of the sale, or if the company management prefers to clear doubts, whichever is earlier. Investors seem to have lost interest in the development, the stock trades over 2 per cent lower as compared to Monday, when it saw a sharp move despite the news coming after market hours.