General approval for deal to cut debt and interest outgo stock expected to benefit focus now on operational delivery
Pantaloon, which had consolidated debt of Rs 7,800 crore and core retail debt of Rs 5,800 crore, paid 61 per cent of earnings before interest, tax, depreciation and amortisation (Ebitda) as interest charges in the December quarter, against 45 per cent in the previous corresponding quarter.
The company, the country’s largest retailer, was paying as much as Rs 120-130 crore as interest every quarter. This was expected to further rise, to as much as Rs 150-160 crore a quarter. The high outgo also ate into the profits, with net profit dropping 71 per cent year-on-year (y-o-y) in the December quarter of 2011-12. Brokerage house Prabhudas Lilladher expects Pantaloon to report a 2011-12 bottom line of Rs 120 crore, about 37 per cent lower than the previous year.
At over two times, Pantaloons also had one of the highest debt to equity ratios among retail companies.
With the Aditya Birla Group deal, Pantaloon’s debt is expected to get reduced by Rs 1,600 crore, considered substantial by many analysts. “Their debt liability will reduce and it is what the company was looking for. It will be substantial savings in terms of interest costs and impart more credibility in the capital markets,” says D K Aggarwal, chairman of New Delhi-based SMC Investments.
Kishore Biyani was planning to to trim debt by Rs 2,500 crore and infuse Rs 1,500-2,000 crore equity over the next 12-18 months by selling stakes in his various ventures such as hypermarket chain Big Bazaar, homeware retailer Home Town and so on. Further delay in debt reduction and equity infusion would have posed serious challenges.
Aggarwal expects a savings of Rs 200 crore in terms of interest outgo every year. “Definitely, it will improve profitability, improve the leveraging capacity and, more important, infuse new life into the company,” he added.
Adds Arvind Singhal, chairman of Technopak Advisors: “I think it is a good move for Pantaloon, which was looking to divest assets and deleverage its balance sheet. At a valuation of Rs 3,200 crore, they have got good valuation.”
Some analysts also say the company’s stock could see some surge after the deal. The Street has punished the stock, both on account of higher debt and the fact that it could not get foreign direct investment, with the government putting the multi-brand foreign investment policy on hold. The stock has fallen 46 per cent since June 2011.
“Once the open offer triggers (Aditya Birla Nuvo will make an open offer after the demerger of the business) over the next three to six months, some benefit could accrue to investors . And, overhang on the stock will reduce after the reduction in debt. How much reduction will take place, only time will tell,” says Rikesh Parikh, vice-president, market strategies, at Motilal Oswal Securities.
Adds Ajay Parmar, co-head of investment banking at Emkay Global Financial Services: “I think, for the time being, the pressure is over. All eyes will be on how the deal will unfold over the next few months.”
Though debt issues are over for the time being, some say the new entity has to deliver on operational efficiencies and financial performance.
“It is not end of the problem. Debt issues are sorted but the business has to show results,” says Aggarwal of SMC.
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