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Pantaloon: Research meet excerpts - Views on News from Equitymaster
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Pantaloon: Research meet excerpts
Aug 16, 2007

We recently met the management of Pantaloon to understand the growth prospects of the sector in general and the company in particular. The following are the key excerpts of the meeting. Square feet expansions: Pantaloon Retail has ambitious plans for the next three years. Currently, the company’s floor space is around 5.5 m square feet and is looking to more than double its floor capacity to 13 m sq. ft. by 2011. All these properties are on lease basis. As far as the expansion is concerned, the company had identified the properties and had signed the agreements two years back. Being proactive has always helped the company gain strong foothold in this competitive market. As the company has signed the agreements before the realty boom actually gained pace, it has insulated itself from the current skyrocketed rentals. While this is a positive, execution still remains a concern. Though the company has signed properties at reasonable rates, any delays in mall development will delay the opening of stores affecting the company adversely.

Going forward, the company intends to maintain its current practice of signing deals at competitive prices, which will help it grow without taking a hit on its margins or return on capital.

Expanding to grow:Pantaloon has well diversified its revenue stream. It has stores across the cross-section of the society. Currently, the company derives 45% of the revenues from the fashion segment, 20% from food, 10% is contributed by electronics and furniture section, 5% by the communication segment, 10% from general merchandise and the remaining by the other segment. In the next 3 to 4 years, it expects food and fashion segment to contribute 30% each to the total revenues, followed by electronics (25%), communication (5% to 7%) and general merchandise (10%).

Though the company was able to deliver on its plans till date, one cannot ignore the fact that the company had little or no competition then. Going forward, consumers will have options. Thus, attracting customers to its retail stores will force Pantaloon to offer discounts, increase ad spend and also source the stock-keeping units from vendors at negotiable prices to maintain the net margins at 3% to 4% going forward. The fact that the company operates on a huge scale may be enable it to withstand these risks as compared to its competitors. Having said that, the company is not completely insulated from the same.

New initiatives: Pantaloon operates multiple retail formats in both the value and life style retailing segments. Further in line with its vision to deliver everything, everywhere, every time for every Indian consumer in the most profitable manner, the company has planned to open 1,500 ‘KB’s Fair Price Shop’ with an area size of 1,200 to 1,500 sq ft each. The aim of opening formats of a smaller size is to cater to the daily needs of the consumer and inculcate the habit of modern retail shopping. These shops will cater to the needs of the urban poor. The shops will stock approximately 300 units and will be offered at a discounted price.

Funding: Pantaloon has outlined aggressive expansion plans to the tune of Rs 60 bn, which will be funded partly through internal accruals and partly by debt.

What to expect?
At the current price of Rs 500, the stock is trading at a price to earnings multiple of 56 times its trailing twelve months earnings. The management’s focus on setting up new stores and looking at other related retail initiatives are expected to augur well from a long-term perspective. However, execution risk remains a concern. Therefore, we advise investors to exercise caution, especially in light of the current valuations, which we perceive to be on the higher side.

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