Religare keeps ACCUMULATE on Pantaloon

Religare keeps ACCUMULATE on Pantaloon

Against the backdrop of macro headwinds and a slowdown in consumer spending, Pantaloon Retail (Pantaloon) plans to expand aggressively in the value retailing space through its Big Bazaar and Food Bazaar stores.

We expect Pantaloon to double its retail space from 7.9mn sq ft in FY08 to 15.7mn sq ft by FY11, with value retail initiatives driving revenue CAGR of 40% over the same period.

Although a higher contribution from value retailing will adversely impact the company’s gross margin, lower overheads will support its EBITDA margin going ahead.

Although the promoters have indicated their intention to convert outstanding warrants, we believe they would refrain from doing so primarily due to the steep conversion premium over the current stock price. We, thus, expect the company’s expansion drive to be fuelled solely by debt.

We have adopted an SOTP valuation method for Pantaloon, valuing the core business at 8x one-year forward EV/EBITDA, its subsidiary Home Solutions at 0.3x one-year forward price/sales, and its 55% stake in Future Capital at a 20% discount to market cap. This gives us a target of Rs240; we initiate coverage with an ACCUMULATE rating.