Same-store sales at India’s biggest publicly traded retailer, Pantaloon (Retail) India Ltd, are showing definite signs of improvement. Earlier this year, growth had fallen to the low single digits owing to the slowdown in the economy.
Growth in the value segment stood at 5% in February and March, while in the lifestyle segment it stood at 4% in the same period. This improved to 7% in the case of value retailing and 6% for lifestyle retailing in April. Now, for two successive months, same-store sales in the value and lifestyle segments have risen by 8%.
But all this and much more is captured in Pantaloon’s share price, which has risen by 156% from its March lows to Rs274 per share. The S&P CNX Nifty index on the National Stock Exchange, during the same period, has risen by about 60%. For some reason, the markets seem to be believing that Pantaloon will benefit much more from the improvement in market sentiment and the macroeconomic situation than the broad market.
To be sure, Pantaloon’s business model thrives when there is fresh capital infusion, since that allows it to open more stores and maintain growth at the high levels investors have been used to for the company. The improvement in market sentiment, therefore, is a positive for the company since it would be able to raise cash.
However, the company has been trying to make a preferential allotment for at least a month, and nothing has been finalized yet. Mint had reported in early June that Pantaloon is likely to make a preferential allotment at a price of Rs400 per share to a private equity investor, a considerable premium to the then prevailing price of Rs300.
It now seems more likely that the firm would make a QIP (qualified institutional placement) issue. QIP issues are normally done close to the market price and it’s unlikely that it would be able to sell shares at a price much higher than the current price of Rs274. An issue at Rs400 would have resulted in an equity dilution of about 16%, but based on current prices, the dilution would be around 23%. At current levels, the stock seems overpriced.
Institutional brokerages such as Citigroup and IIFL Capital have a price target of Rs180 and Rs165, respectively. Adjusted for the value of subsidiaries, the core business trades at about 25 times estimated earnings for fiscal year 2009-10.
To be sure, the company’s valuations can be justified using liberal assumptions, but one must note that fund-raising in current times is not as easy and cheap as it used to be during the boom. Besides, the company’s home retailing subsidiary has been a drag on its consolidated performance.
Although sales of the value and lifestyle retailing businesses have picked up, consolidated same-store sales, including home retailing, continue to languish at around 3-4%.
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