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Pantaloon restructuring may make it attractive to investors

Pantaloon restructuring may make it attractive to investors
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First Published: Mon, Nov 23 2009. 11 26 PM IST

 Merger possibilities: A file photo of a Big Bazaar store in Noida. Separating Big Bazaar will appeal to foreign retailers such as Carrefour SA for a possible tie-up. Mint
Merger possibilities: A file photo of a Big Bazaar store in Noida. Separating Big Bazaar will appeal to foreign retailers such as Carrefour SA for a possible tie-up. Mint
Updated: Mon, Nov 23 2009. 11 26 PM IST
New Delhi: Analysts have welcomed an announcement last week by the Future Group, which controls Pantaloon Retail (India) Ltd, the country’s largest publicly traded retailer, that it will restructure its businesses into three categories—retail, financial services and allied services.
Merger possibilities: A file photo of a Big Bazaar store in Noida. Separating Big Bazaar will appeal to foreign retailers such as Carrefour SA for a possible tie-up. Mint
Although the group has not yet detailed the specifics of the restructuring, it is clear that it will hive off its flagship Big Bazaar stores, which accounted for 65% of Pantaloon’s revenue of Rs6,347 crore in the year ended 30 June, into a separate subsidiary. The company counts its fiscal year from July.
It is also expected to bring together the businesses of financial services firm Future Capital Holdings Ltd, Future Generali India Life Insurance Co. Ltd and Future Generali India Insurance Co. Ltd. How it plans to do this is still unclear. The insurance businesses are joint ventures with Channel Islands-based Generali International Ltd.
Meanwhile, units including Future Brands Ltd, that creates private labels in consumer products, Future Knowledge Services, a retail technology service provider, and retail training unit Future Learning and Development Ltd will be clubbed together.
Currently, the different business segments are part of Pantaloon’s balance sheet. But soon they will move as separate units with separate balance sheets, according to the group’s spokesman Atul Takle, who added that the restructuring is aimed at unlocking values of the various segments.
“It’s a smart move in the sense that its gives clarity to where it got the recognition from—that is the core retail business,” said Sonam Udasi, group head for consumers at Brics Securities Ltd. It will become “easier to ascertain value”, of those businesses, he added.
“The restructuring will provide more clarity to investors who can choose which part of the business they wish to invest in,” said Pranshu Mittal, assistant vice-president for research at Centrum Broking Ltd. “Currently, one doesn’t know where the money is going—if it’s being used by Big Bazaar or any other business.”
“The company took a hit as it went into consumer finance and insurance. The insurance business leaked about Rs120 crore last year,” Udasi said. “These are all issues that investors will start wondering as capital is difficult to come globally.”
Of the four brokerages Mint spoke to, three recommend buying the Pantaloon scrip while a fourth has revised its rating from sell to hold.
The experts said Pantaloon’s latest move is driven by the fact that the company is looking to raise capital; it needs between Rs1,800 crore and Rs2,000 crore to expand in the next two years.
In a bid to raise money, Pantaloon’s flagship Big Bazaar chain is being spun off as a separate entity so that the new model is attractive to investors, they said.
Pantaloon now operates 119 Big Bazaar stores and plans to raise the number to 275 by 2014.
Meanwhile, Pantaloon raised about Rs500 crore on Friday by selling stake to institutional investors, according to a person directly involved in the process, who spoke on condition of anonymity.
The money raised will be used for expansion and also reduce pressure on the firm that has a debt to equity ratio of 1.3:1, according to analysts tracking Pantaloon.
“The Rs500 crore that’s been raised will not only bring the debt to equity ratio to 1:1,” said Anubhav Gupta at Kim Eng Securities, “it will also be enough to fuel growth for the next 7-8 months.”
“Pantaloon adds 2.5 million sq. ft of retail space every year. For that it needs close to Rs700 crore each year. They need about Rs1,000 crore to be in a steady state,” Udasi said.
Separating Big Bazaar will address two critical issues. One, it will be relatively easier to raise money as the retail chain is a successful model with significant business potential. Two, it would appeal to foreign retailers such as Carrefour SA for a possible tie-up.
Pantaloon is in talks with the French retailer for a partnership in the wholesale space, the only model where the Indian government allows 100% foreign direct investment.
A stand-alone Big Bazaar could be a better fit as a partner for Carrefour that is planning a wholesale cash-and-carry venture in India.
“We’re not sure if the move is in line with what Pantaloon wants to do with Carrefour. A cash-and-carry model will be more (inclined) towards Big Bazaar side of business,” said Kunal Lakhan, the analyst who tracks Pantaloon at KR Choksey Shares and Securities Pvt. Ltd. “Maybe the whole restructuring exercise is (aimed at Carrefour), so that it has a structure in place,” if and when a deal comes through.
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First Published: Mon, Nov 23 2009. 11 26 PM IST