Pantaloon Retail (India) Limited (PRIL), India’s biggest Retailer operating under the umbrella of the Future Group, has grown at a faster CAGR of around 69% over FY2006-08 vis-à-vis peers.
PRIL operates in all product categories and formats and hence induces maximum consumption while catering to all strata of consumers. It is a vertically integrated player with in-house auxiliary support services like logistics, financial services, insurance and media to induce higher consumption and investment advisory to invest in retail destinations.
PRIL has matured over the years to attain leadership position and counter risks faced by other players in the Industry. We are positive on PRIL, as we believe it has the right strategy in place driven by a good management to expand and grow at a faster rate and expand Margins.
We believe that PRIL has a competitive advantage over other players in terms of a scalable business model, pan-India presence and lower execution risks.
Outlook and valuation
At Rs210, the stock is trading at 14.2x FY2010E Earnings and 1.8x FY2010E P/BV. Valuing PRIL (standalone), we estimate it to register a RoE of 17% FY2013E onwards.
We have conservatively valued PRIL on P/BV basis and are positive that the stock would witness a re-rating once the macro-environment improves.
We believe a two-stage growth model would be appropriate to factor in medium-term high growth and long-term stable growth. We estimate the high growth stage to last till FY2019, registering a CAGR of 20%.
After FY2019, we estimate PRIL to grow at a CAGR of 7% till perpetuity. We have assumed cost of equity as 14% and discounting FY2012E P/BV with the same provides us with a fair FY2010E P/BV of 1.82x, valuing PRIL’s Standalone business at Rs218.
We have valued PRIL’s stake in FCH, HSRIL, FLSL and Future Bazaar at Rs33, Rs13.2 and Rs19.9 respectively, thereby adding a value of around Rs66 to PRIL’s fair value of Rs218.
We initiate coverage on the company with a BUY recommendation and SOTP target price of Rs284.