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INDIA RESEARCH
Rs352
Pantaloon Retail OUTPERFORMER
Big Bazaar Food Bazaar Pantaloons Central Brand Factory Other Formats
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0
FY07 FY08 FY09
Source: Company Annual Report
• Revenues grew by 25.6% yoy to Rs63.4bn with value retail revenues at Rs45.3bn and lifestyle retail revenues at
Rs17.7bn.
“For Private Circulation only” and “Important disclosures appear at the end of this report”
IDFC - SSKI INDIA
• During the year, number of footfalls increased by 13.5% to 185.3m, conversion increased from 41.3% to 43%,
average ticket price increased by 5.6% at Rs791.6 and average selling price increased from Rs92.2 in FY08 to
Rs105.1 in FY09.
Exhibit 2: PRIL – performance on operational parameters
Footfalls Conversion
(m) (%)
185
200 44
163 43
43
150 43
115
100 42
41
50 41
0 40
FY07 FY08 FY09 FY07 FY08 FY09
400 60
200 30
0 0
FY07 FY08 FY09 FY07 FY08 FY09
• Owing to the economic slowdown in FY09, PRIL witnessed a significant slowdown in same store sales growth – for
value retail to 7.4% (10% in FY08) and for lifestyle retail to 6% (10.3%). Nevertheless, the numbers are far ahead of
that for rest of the industry, which witnessed same store sales decline.
• While Pantaloons, the departmental store format, saw sales per sq. ft improving from Rs6,576 in FY08 to Rs6,816
in FY09, sales per sq. ft for Big Bazaar dropped from Rs7,925 to Rs7,412 with a steep decline for Central from
Rs7,817 to Rs6,616 (mall footfalls dropped the most).
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IDFC - SSKI INDIA
6,000
4,000
2,000
0
Pantaloons Big Bazaar Central
Source: IDFC SSKI Research, Company
• Overall EBITDA margins improved by 140bp to 10.5%. While gross margins dropped by 30bp to 30.1%, PRIL
witnessed substantial savings on overheads like employee cost, advertising cost and lease rentals. Overheads have also
eased as PRIL has cut down on non-profitable formats.
• With value retail share increasing from 71.7% in FY08 to 71.9% and a change in the inventory valuation method,
gross margins have contracted by 30bp. Share of private label brands stood at 18% in FY09.
• As PRIL initiated the staff rationalization process, employee cost to sales ratio has dropped from 5.4% in FY08 to
4.3% in FY09. Staff cost has remained unchanged despite addition of 1.8m sq. ft. This is also partly attributable to
shifting of some back-end functional staff to Future Knowledge.
• Lease rental cost has dropped only marginally from 6.5% of revenues to 6.4%, despite a drop in sales per sq. ft. This
implies that average rentals per sq. ft have dropped substantially.
• PRIL has cut down on its advertising spends while gaining from economics of scale and lower ad rates in FY09.
Total advertising spends have dropped from Rs1.18bn to Rs1.14bn (savings of 50bp)
Exhibit 4: Cost structure
(% of revenues) FY08 FY09 Change bp
COGS 69.6 69.9 29.0
Employee cost 5.4 4.3 (110.4)
Rentals 6.5 6.4 (6.4)
Advertising and selling expenses 2.6 2.0 (56.5)
Manufacturing & other expenses 6.9 6.9 2.3
Source: IDFC SSKI Research
• While EBITDA grew by 45% in FY09, PAT is up by just 12% on the back of higher depreciation and interest costs.
• Depreciation during the year increased sharply from Rs834m in FY08 to Rs1.4bn in FY09. This is largely
attributable to heavy investments made by PRIL into IT Software. PRIL has invested Rs1.6bn during the year on
computer and software, which are subject to a significantly higher rate of depreciation (Rs509m charged as
depreciation on computer and software in the current year as against Rs301.3m in FY08). Depreciation on furniture
and fittings has increased from Rs266m to Rs429m.
• Interest cost increased from Rs2bn to Rs3.2bn on the back of increase in total debt from Rs21.9bn to Rs28.5bn.
Also, the global liquidity crunch of Oct-Dec 2008 drove weighted average cost of debt higher from 11.15% to
11.37%.
• EBITDA to interest ratio declined from 2.48x in FY08 to 2.1x in FY09.
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IDFC - SSKI INDIA
Outlook: PRIL has lined up calibrated-growth plans in the coming years with focus on Big Bazaar, Food Bazaar,
Pantaloons, Central and Brand Factory. With the ongoing economic recovery, PRIL is expected to add ~4.6m sq. ft of
retail space over FY09-11. This, coupled with sustained same store growth of 8-10%, would help PRIL register 26%
CAGR over FY09-11E. PRIL has more aggressive plans on the lifestyle formats – we expect 6 new Centrals in FY10
(taking the tally up to 15) and 10 Pantaloons (55 stores). The management has indicated its target of increasing sales
per sq. ft to Rs9,000 over the next couple of years. While we expect same store sales growth to drive improvement in
sales per sq. ft, higher growth in Central format (which has lower yield) would restrict sales per sq. ft to Rs8200 by
FY11. Also, we believe that PRIL has very limited scope to curtail, costs from here and thus estimate 40bp of EBITDA
margin erosion to 10.1% in FY11. However, PAT growth is expected to be much better in view of a lower interest cost
burden.
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IDFC - SSKI INDIA
• Gross current assets have increased from Rs26.3bn to Rs32.8bn, i.e. per sq. ft gross current assets have increased
from Rs3,338 to Rs3,396. Net Working Capital as of end-FY09 stood at Rs23.7bn, up from Rs19.9bn in FY08. On
per sq. ft basis, net working capital stood at Rs2,453, lower than Rs2,528 in FY08.
• Of the total Rs6.5bn increase in gross current assets, Rs3.6bn is towards inventory. Inventory stood at 103 days and
inventory per sq. ft has increased from Rs1,815 in FY08 to Rs1,850 in FY09.
• With a series of measures taken towards inventory management including moving to Auto Replenishment System,
warehouse management, SKU rightsizing, etc, PRIL targets to bring down the inventory levels from Rs1,850/ sq. ft
to Rs1,600 over the next two years.
• Loans and advances have increased from Rs9.6bn in FY08 to Rs12bn in FY09, including Rs8.16bn of deposits
(Rs7.15bn in FY08) and Rs3.57bn of advances to other-than subsidiaries (Rs1.8bn in FY08).
• Of the total deposits, we estimate ~Rs4.5bn to be towards deposits on existing operational stores (10-11 months of
rentals) and ~Rs3bn towards upcoming stores.
• Creditor days have increased from 35 in FY08 to 46 in FY09.
• Cash on books stood at Rs1.1bn as on 30 June 2009.
Outlook: With leveraged books and lack of external capital, PRIL’s focus for the next two years is on improving its
balance sheet health through deleveraging and operational efficiency. We expect balance sheet size to increase at only
10% CAGR the period vis-à-vis 26% CAGR over FY09-11 with capex per sq. ft expected at Rs1,200 from hereon and
networking capital to drop from Rs2,453 per sq. ft to Rs2,200 by FY11. The deleveraging of balance sheet has already
commenced with the recent fund raise of Rs5bn through QIP bringing down gearing to below 1x. Also, the
management targets to bring down inventory per sq. ft to Rs1,600, which would release ~Rs2.5bn from existing retail
presence of 10m sq. ft. Of the Rs15bn of capex requirement over the next couple of years, we estimate Rs9bn to be cash
profit from operations, Rs5bn already raised through QIP and the remaining through efficiency improvement gains.
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IDFC - SSKI INDIA
• Future Generali Insurance (Life and Non-Life) businesses also added Rs340m to the losses while Future Axiom
Telecom accounted for another Rs329m of losses. PRIL has scaled down business operations of Future Axiom
Telecom.
RESTRUCTURING PLANS
• PRIL has announced a three-pronged restructuring plan to effect derisking of the retail balance sheet from non-retail
businesses like Future Generali Insurance, Future Capital, Future Knowledge, Future Brands and Future Learning.
The proposed restructuring is as under:
• Three of the subsidiaries transferred to promoter Group Company: Future Knowledge, Future Learning and
Development, and Future Brands have been transferred to promoter group company – PFH Entertainment. The
transfer has happened at Rs1.9bn as against the total invested capital of Rs900m by PRIL. While Future Brands
owns IPR of all of PRIL’s private label brands, Future Knowledge Services offers back-end services like IT and
call centre to PRIL. Future Learning and Development offers recruitment, induction and training services to
retail personnel.
• Derisking the retail balance sheet from Future Capital and Future Generali: PRIL has announced its plans
to reduce direct investment in Future Capital and Future Generali to ~26%. PRIL plans to transfer its holding
in Future Capital (a 54.75% stake) and Future Generali (49%) into a separate subsidiary, which will be duly
listed. Existing shareholders of PRIL will be issued shares in this holding company. Future Group is also mulling
over plans to merge the insurance business with Future Capital and this would completely derisk the balance
sheet of PRIL’s retail operations from the cash flow requirement of Future Generali Insurance. We believe that
this would be a major positive and would trigger re-rating of PRIL’s retail business operations.
• Transfer of value retail business into 100% subsidiary: PRIL would be transferring its value retail business
into a 100% subsidiary. This subsidiary will own Big Bazaar and Food Bazaar, which currently account for
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IDFC - SSKI INDIA
~72% of PRIL’s revenues. PRIL intends to raise funds at the value retail business level and is also reportedly in
talks with global retailers like Carrefour as a strategic partner. Given the fact that these retailers would be quite
keen to participate in the value retail business, the transfer of value retail assets in subsidiary is imminent.
Alternatively, PRIL is also open to raising capital at the value retail level. We believe that while roping in a
strategic partner would be positive for PRIL, transfer of the business for the only purpose of fund raise through
capital market may not be value-accretive as it may attract a holding company discounting at PRIL’s level.
• PRIL has recently raised Rs5bn through issuance of 15.8m shares at Rs316 per share through the QIP route. These
funds bring down the gearing to below 1x and would suffice to fund growth for the next 15 months without any
pressure of raising further debt. We see this as a key positive step towards deleveraging of the balance sheet.
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IDFC - SSKI INDIA
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Explanation of Ratings:
1. Outperformer: More than 10% to Index
2. Neutral: Within 0-10% to Index
3. Underperformer: Less than 10% to Index
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