Pantaloon: A new format

The restructuring should help strengthen the balance sheet and create value for shareholders.

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.