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Too early to celebrate for Pantaloon retail

Priya Kansara Pandya  |  Mumbai 

Kishore Biyani

Valuations may prove to be a hurdle, while real gains will take time to yield.

Stocks of organised retail companies like Pantaloon Retail and Shoppers Stop have been in action in the recent past on hopes that foreign direct investment (FDI) in the retail sector will lead to gains for the companies. On Thursday, too, these jumped by as much as 14 per cent, with the biggest gainer being Pantaloon. It rose 14.07 per cent to close at Rs 203.90 on the National Stock Exchange (NSE).

Though FDI is expected to bring sea change for the $600-billion domestic retail sector in the long run, the immediate benefit would be infusion of capital. Many retailers are in need of funds because high leverage, coupled with slowdown in business, has impacted their profitability.

Abneesh Roy, analyst, Edelweiss Securities, says: “The reform will be positive for the entire Indian retail sector, as it would stimulate investment, especially in logistics and cold-chain development, besides reducing debt overhang.”

in Rs  crore FY11 FY12E FY13E
Net sales 11,013 12,785 14,986
% chg y-o-y 23.4 16.1 17.2
Operating profit 960 1,118 1,309
% chg y-o-y 17.2 16.5 17.1
Net profit 190 176 251
% chg y-o-y -17.4 -7.4 42.4
E: Estimates   Year ended June (Core retail)   Source: Analyst reports

Though the FDI announcement is likely to have a positive rub-off on share prices of retail companies in the near term, analysts say, gains for the companies from investment in infrastructure and expansion will accrue only in the longer run. Riders put down by the government and high stock valuations may also act as challenge for deals to click immediately.

Pantaloon Retail is expected to be the biggest beneficiary of FDI, as India’s largest retail player is present across many formats, including supermarkets (Big Bazaar), department stores (Pantaloons, Central) and electronics (eZone), among others. The company plans to expand its total retail space from 15 million square feet as of June this year to 25 million square feet in three-four years. The economic slowdown and higher leverage have impacted its business and profitability.

The September quarter saw the company’s value and lifestyle business segments report its slowest same-store sales growth in the last 13 quarters. Further, interest costs have formed nearly 61 per cent of consolidated operating profit in the last two quarters (consolidated debt stood at Rs 7,846 at the end of 2010-11). This, along with an already high consolidated debt-equity ratio of 2.5 times (for the year ended June), is impacting its ability to expand.

Therefore, FDI could prove helpful. Bharat Chhoda, analyst, ICICI Direct, says: “Since Pantaloon is highly leveraged, funds for expansion will have to be raised through routes other than debt. So FDI in retail would benefit it.”

Morgan Stanley analyst Nillai Shah says: “Pantaloon has demonstrated an ability to develop appropriate business models to capture a dominant share of consumer spending in India. This, combined with over 15 million square feet of prime real estate under various successful formats (compared to four-five million for its nearest competitor), is likely to make it a preferred partner among foreign retailers.”

Another beneficiary will be Trent, a Tata group company, which operates value and lifestyle businesses under Star Bazaar (seven stores in five cities) and Westside (49 stores in about 30 cities). Roy says: “Pantaloon and Trent will benefit as these companies currently have or are in the final stages of tie-ups with global retailers eagerly waiting to enter India.”

Shoppers Stop is currently not looking for a partner and, hence, is not expected to immediately benefit. B S Nagesh, its vice-chairman, has been quoted as saying that FDI in multi-brand retail will help only if somebody is looking at selling something or looking at partners.

The government, however, has put down riders like minimum investment amount, including in back-end infrastructure like cold storages, soil testing labs and seed farming.

Further, the chains will be allowed to operate only in large cities with certain percentage of goods procurement from small industries.

Amid these riders, sourcing could be a key challenge, as most global players are used to sourcing from a particular country or a supplier and, thus, may have to shift sourcing base. This, they might not find comforting, says an analyst.

Valuation is another issue. For instance, Pantaloon’s board last month cleared a proposal to raise up to Rs 1,500 crore through issue of equity-linked securities (equity dilution of up to 15 per cent). On the other hand, given its current market capitalisation of Rs 4,162 crore, a 15 per cent dilution will help raise only Rs 625 crore, indicating a gap between expectations and reality.

Analysts say a way of getting higher valuation would be faster exit from non-core businesses, including Future Capital Holdings, which is expected to fetch around Rs 3,500 crore. Chhoda says: “The negatives of the non-core businesses will be removed from consolidated earnings and, thus, the overall valuation will get a boost.” However, tough market conditions are making it difficult for the company to achieve this goal.

On the other hand, Indian retail stocks are already trading at valuations higher than those of global peers. For example, Pantaloon trades at 18 times its FY13 estimated earnings, significantly higher than 13 times (earnings for calendar year 2012) for Walmart, the world’s largest retailer. Shoppers Stop, too, is quoting at 29 times its FY13 estimated earnings.

First Published: Fri, November 25 2011. 00:45 IST