Every once in a while, investors get excited about rumours that the government would soon allow foreign direct investment (FDI) in the multi-brand retail format. We’re in the middle of one such phase. Shares of retailing companies—Pantaloon Retail (India) Ltd and Shoppers Stop Ltd—have risen by 12% and 16%, respectively, in the past week and by around 25% each in the past one month.
Besides, a large number of shares have changed hands in the FII-to-FII segment at price levels that are over 20% higher than prevailing rates in the main market. On Wednesday, the weighted average price at which Pantaloon shares traded in the main market stood at Rs 304.50 on the National Stock Exchange. But 250,000 shares changed hands in the FII-to-FII segment at Rs 367.20 a share. Pantaloon shares trade in a separate segment to facilitate trades by FIIs (foreign institutional investors), who cannot buy from the main market as the FII shareholding limit has been breached.
But an FII trade at a significant premium shouldn’t be seen as a sign that a change in FDI rules is around the corner. Such trades have been happening for a long time now. Even so, it does appear that some investors are still hopeful of a relaxation in the rules for retail FDI.
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While investors have been patiently waiting for the increase in FDI limits, they seem to have, however, lost their patience with Pantaloon’s inability to generate free cash flow. For years, the company has operated on negative free cash flow. While this is typical of retail companies that invest large resources in opening new stores, at least some investors were expecting a break-even with respect to free cash flow by now. According to an analyst with a foreign brokerage, who did not want to be quoted, “It now looks like the free cash flow break-even will happen only in fiscal 2013. This is causing impatience among investors, especially considering that Shoppers Stop has been able to generate free cash flow.” It is little wonder that while Pantaloon has participated in short-term rallies such as the one last month, it has underperformed over the longer term.
In the past one year, its shares have fallen by nearly 30%, even while the broader markets have risen by 4%. More importantly, the Shoppers Stop stock has jumped by 94% during the same period. According to some analysts, Pantaloon will benefit more if FDI rules in the retail sector are relaxed, since the company has gone through restructuring and has housed its pure retail business as a separate entity. Be that as it may, in the overall scheme of things, investors who have stuck to Pantaloon seem to have lost out.
Graphic by Yogesh Kumar/Mint