Over the last few years there has been a fundamental change in the Indian retailing industry, with a very perceptible shift from unorganized kirana shops to organized retailing. Increased purchasing power coupled with aspirational demands of a segment driven by exposure to western world because of media and increased foreign travel is driving this. The sector witnessed the entry of concepts like Shopper's stop, Crossroads and discount chains like Subhiksha. Pantaloon Retail (India) Ltd (Pantaloon) is the one of such listed company to enter this business, with a presence in both discount shops (Big Bazaar) and retail stores (Pantaloon outlets).

We initiate coverage on Pantaloon with a STRONG BUY because:

• The only listed Indian Company to successfully launch discount stores (at Hyderbad and Calcutta branded as Big Bazaar) and plans to have chains of similar nature, which targets the large and growing upper-middle and middle class of Indian society. This is totally contrast to other organized retailing players, which are targeting the HNI (High Networth Individuals) and whose market is currently saturated.

• Pantaloon has second largest selling space amongst the retailers, after Bata. This is backed by complete automation of the retail outlets. After completion of the central hub at Mumbai the company’s operations would be fully integrated which would give its operating efficiency a boost.

• Company has strong owned brand names in its portfolio. The brands include Pantaloon, John Miller and Bare. Higher percentage of "own brand" sales improves margins, thus reducing break-even level of sales.

• Further, the company plans to diversify from apparels to household items in its discount stores. This will enable them to enlarge the basket of offering.

• Currently FDI participation in retail is not allowed, but in case this happens this is a stock waiting to be acquired. Any upside on acquisition is an added bonanza for investors, when it will happen is anybody's guess and we are not commenting on it.

At the current market price of Rs.35, Pantaloon trades at 6.3x FY02 and 3.4x FY03 earnings. Stock re rating will be driven by completion of fund raising (promoters allotted shares to themselves at SEBI price of around Rs31 in February second week) and launch of Big Bazaar in Mumbai. We set a price target of Rs 75 over the next six months.

Background

Pantaloon Retail India limited is the Flagship Company of the Pantaloon group promoted by Mr. Kishore Biyani. It has been one of the pioneers in organized retailing in India. It began its retailing operations in India, way back in 1987. Currently it manufactures and sells readymade garments through its own retail outlets and two discounting stores. Company plans to diversify into business of discounting in a big way, which is targeted at the growing middle class segment.

It has India's second largest retail chain with 17 retail outlets & two Discounting stores branded as Big Bazaars across the country at an estimated retail space of 401,300 sq.ft. The company plans to double its retail space in the next couple of years.

Why discount stores… It’s all about volumes!

NCAER study shows that only 0.25% of total population falls in the category of earnings above Rs. 500,000. Most of the organized retailers are targeting this supra-niche segment for higher margins. In a country where a miniscule population can afford the expensive stores, Pantaloon has come up with an excellent revenue model, focussing on "value for money" segment.

Pantaloon plans to target the upper middle and the middle class segment, which forms the large chunk of Indian population. This segment is very price conscious and always looks out for VALUE FOR MONEY. Pantaloon has already opened two of its many to come discount stores at Hyderabad and Calcutta. It also plans to sell household items through its discount stores along with apparels.

Since the company has got strong brands like John Miller, Pantaloon coupling it with discount store model would fuel the sales to the larger population. Thus clearly shows that the company plans to go for the VOLUME route to increase its top and bottom line and reduce the break-even period.

This concept of discount stores resembles the Wal Mart strategy. In India and especially in cities like Mumbai, Bangalore, Calcutta and Hyderabad where the population is dense and consists of a high middle class population, concept of discount stores would gain a lot of currency. The company plans to expand in a rapidly. In next year it plans to open its stores in Mumbai, Delhi at critical locations. It has plans to open three Big Bazaars (Discount Stores) at "A class cities " like Bangalore.

Concerns

• Fund raising for expansion – The aggressive expansion plans of the company cannot be met from internal accruals. This means that the company has to tap external sources to fund expansion. The company has recently allotted shares to promoters at SEBI formula price. We believe that in addition to the share allotment to the promoters, the company would borrow heavily to fund its expansion plans. As a consequence increased interest payment and depreciation expense, the net profit margins would remain flat.

• Quality of management is not A class, like Trent. A foray into films by a subsidiary adds fuel to fire. We expect perceptions about management to change as the markets slowly discount the earnings growth story.

We believe that due to the current revenue model of the company the top line would grow at a rate of 95-100% per annum from current levels of Rs. 1720 mn for next year and 50% for next couple of years. PAT would grow on yearly basis by 50-60%

We expect that the company would post a top line of Rs. 2800 mn by FY02 and bottom line of Rs. 110 mn.

Team 5Paisa

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