The flurry of news articles this month about Pantaloon Retail (India) Ltd haven’t had any impact on the company’s shares. But that’s because Pantaloon’s shares had already nearly trebled to the Rs300 levels, from its low of Rs107 in early March. There’s no doubt that the reported fund-raising of about Rs1,000 crore would be positive for the company, especially since it would reduce its debt burden. But most of these positives already seem to be in the price.
Mint had a report earlier this week that Pantaloon is likely to make a preferential allotment at a price of Rs400 per share. If this materializes, there may be some upside left from current levels, as equity dilution would be lower than expected. If the Rs1,000 crore issue was made close to the Rs300 level, the dilution would be around 19%, while an issue at Rs400 would result in a dilution of about 15%.
According to a recent research report by IIFL Capital, the institutional broking division of IndiaInfoline Ltd, even if the shares are issued at current prices and dilution is around 19%, the fund infusion could be earnings accretive since it could significantly reduce interest costs.
The IIFL Capital report states even if Pantaloon uses 30-40% of the proceeds from the proposed fund-raising for retiring debt, its debt-equity ratio would reduce from 1.2 times to 0.6 time. The balance would be more than sufficient to meet the company’s expansion plans for the medium term, especially considering that there would also be internal accruals of about Rs600 crore to Rs700 crore in the next two years.
Pantaloon shares trade at a premium of about 8-9% in the trading window meant only for foreign institutional investors, or FIIs, (this is because the investment limit for FIIs has already been reached and they can only buy from existing FIIs). But if a deal is done at about a 30% premium to current levels, valuations may get impacted. But note that despite these positives with the fund-raising, IIFL has set a price target of Rs165 on the stock, which is about half the stock’s current levels.
Investors, therefore, would do well to exercise caution at current levels. Another note of caution is that the company’s same-store sales continue to grow at tepid single-digit growth rates.
Including sales of its home solutions segment, same-store sales grew just 3% in April, compared with 3.6% in February and March, and 5.3% in January.
Write to us at firstname.lastname@example.org