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Pantaloon: Going slow on growth

Nov 24, 2009

Recently, Pantaloon Retail organised an analyst meet to discuss the company’s business restructuring plans and future growth. Here are the key extracts from the research meet. Growing at a slower pace: Pantaloon Retail intends to expand on a cautious note going forward. Earlier the company was expanding aggressively. The motive behind the same was to gain and sustain market share, to maintain its leadership position and to take the benefit of first mover advantage. However, while this aggression helped it to gain market share, it also put margins under pressure. Rising cost of operations and slowing economic growth also impacted performance on the margin front. As the company has achieved scale and plans to focus on maintaining its return on capital, it has decided to vigilantly expand its retail space across India. 60% of the company’s retail space falls in urban areas and Tier I cities. The remaining 40% comprises of Tier II and Tier II cities. The company plans to maintain this ratio of retail footprint.

It plans to add approximately 2 to 2.5 m sq ft per annum over the next three to four years. It has also planned to restructure its business verticals and consolidate Pantaloon as a pure retail play. It has been strengthening its back end activities like supply chain management and has planned to rationalize stock keeping units (SKUs), and increase share of private labels. These initiatives are likely to release cash and cushion margins. For all these initiatives, the company has lined up a capex of Rs 15 bn.

Performance drivers: Consumption seems to back on track with the onset of festive and marriage season. The management believes that the trend of consumers flocking back to shop is not seasonal but sustainable. The company’s future growth is likely to be supported by new store openings and increased consumption by consumers in India. The company has planned to expand its retail space at the rate of 20% per annum. It foresees itself growing at a similar rate of 18% to 20% on the topline front.

The company’s ability to push the customer to the stores with new product offerings, competitive brand launches and rationalizing of SKUs is likely to support topline growth. On the margin front, the company feels the current EBITDA margins of 8% are sustainable, which infact could expand by (1-2%) going forward. We believe that the company may be able to sustain its margins if not expand them. Owing to its scale of operations and being a leading player, the company is in a position to bargain with developers and suppliers. The savings on the operational front would cushion margins in a competitive environment.

What to expect?
At the current price of Rs 330, the stock is trading at a multiple of 39 times its trailing twelve months earnings. Apart from its cautious approach towards growth, Pantaloon has planned to restructure its business segments. The company is streamlining its operations into three business verticals - retail, financial services, and support activities. We believe that this move will enable the company to consolidate Pantaloon’s operations as a pure retail play. It would also enable the company to concentrate on these business verticals separately and improve return to shareholders.

The restructuring would take three to five years to complete. The full benefit of all of these initiatives would be visible only from next year onwards. With these moves, the company is targeting a return on capital employed of 20% going forward. These initiatives are expected to augur well from a long-term perspective once there is revival in the economic cycle. In 1QFY10 Pantaloon was able to report higher growth at the operating level on account of focused cost control measures and such initiatives are expected to help the company sustain profitability going forward.

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