Pantaloon: Unlocking value

Pantaloon: Unlocking value
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First Published: Tue, Aug 21 2007. 02 29 AM IST
Updated: Tue, Aug 21 2007. 02 29 AM IST
Pantaloon Retail shares got a further boost after the company announced that fresh funds worth Rs1,260 crore were being infused in the company, and that the value in one of its many subsidiaries would be unlocked through an initial public offering.
The company’s shares rose 3% on Monday, adding to its outperformance in the past couple of months.
The outperformance (even prior to the above newsflow) is surprising, given the dip in the performance of Pantaloon Retail (India) Ltd’s core retailing business. Sales from same stores of its value retailing business have been a mere 5.6% in the past six months. Growth stood at more than 20% in the six months prior to that. Increased competition in the retail space seems to be eating into Pantaloon’s share of the organized market. Analysts say the launch of a new retail store leads to a drop in sales of existing stores.
In April, May and July (in June, growth was higher at 10%), same-store sales grew by a mere 2%. Most of the growth in the value retailing business, therefore, is coming from new store additions.
The infusion of Rs1,260 crore through a preferential allotment to promoters, employees and private investors, therefore, bodes well as far as growth plans are concerned.
But, it is important to note that the company has committed an investment of Rs325 crore into its venture capital subsidiary. In recent times, the company’s focus has increasingly been on its non-value retailing business. In fact, the reason the stock attracted special attention on Monday was the fact that value in one of these subsidiary companies was about to be unlocked.
With this, Pantaloon will be valued on a sum-of-parts basis, with analysts assigning values for its various subsidiaries. A listing, such as the one proposed for its financial unit—Future Capital Holdings Ltd—may not happen for each of the subsidiary companies. In some cases, it could be a mere divestment of stake to a partner.
But whatever the mode, the theme of unlocking value in subsidiaries is what will drive Pantaloon’s share value, now that the value retailing business has lost its shine.
ICICI Bank Ltd has been one of the worst affected banking stocks in the sell-off, which is why it bounced back by 5.2% on Monday. Retail investors in ICICI Bank Ltd’s recent follow-on offer had watched with dismay as the stock fell below Rs890, the price at which they had been allotted the shares. The bounce-back on Monday offers some relief, although the stock is still below the offer price. The news that the Foreign Investment Promotion Board had cleared the divestment in ICICI Financial Services helped drive the bank’s American depositary receipt up by a huge 13% on Friday. Monday’s bounce in the stock in the Indian markets, therefore, is disappointing.
Several factors led to the fall in the ICICI Bank stock: a sharp deterioration in asset quality, pressure on net interest margins and a huge capital issue. The bank’s positioning as the No. 1 retail lender was perceived to be a liability rather than an asset as interest rates rose, monthly repayments increased and retail borrowing slowed down. Contrast the treatment meted out by the markets to the SBI stock, which has fallen a mere 2.6% in the past one month, while the ICICI Bank stock has lost 11.8% over the same period.
The difference was an excellent quarterly result from SBI, and the perception that the state-run bank’s wholesale finance business was in better shape to withstand the high interest rate environment than ICICI Bank’s retail model. There have also been concerns about mark-to-market hits on the latter’s exposure to Indian corporates’ collateralized debt obligations, credit default swaps and other derivatives, as the spreads on these instruments have widened considerably. CLSA estimates the hit to ICICI Bank’s pre-tax earnings for the current year will be 3.9% on its $1.5 billion (Rs6,240 crore) exposure.
Much will depend, however, on the behaviour of the credit-derivative market going ahead. What the market has not been taking account of in the panic is the fact that here was a bank that had already raised a huge amount of funds and had also leveraged it up to raise still more money from the debt markets. And the good fortune was that all this had been done before the storm hit the financial markets. Those additional resources can now be used by the bank to increase its exposure to infrastructure and corporate assets. At the same time, it provides a funding cushion that could give it breathing space till it plans for hiking low-cost deposits bear fruit. In sum, ICICI Bank should see volume growth and higher margins in the future, while fee growth has been robust. The substantial value being created by the bank’s subsidiaries has also been lost sight of in the panic.
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First Published: Tue, Aug 21 2007. 02 29 AM IST