The Hindu Business Line : Pantaloon Retail: Invest

OFFERED at a discount of more than 60 per cent to the current market price of about Rs 1,600, Pantaloon Retail's rights issue provides shareholders the perfect opportunity to reduce their average cost of acquisition. With the offer proceeds, the retail front-runner will continue to expand aggressively, even as it dabbles with newer formats. The company that has grown at a tremendous pace is now faced with the challenge of keeping the ball rolling, with competitors starting to get their act together.

While Pantaloon has consistently managed to execute its expansion projects, forays into new categories will have to be equally successful for it to be able to deliver the kind of growth it has managed in the past. Shareholders can retain their holdings but expect only moderate returns from the stock that is now trading at rich valuations.

Few stocks have the privilege of trading at valuations that Pantaloon enjoys; the stock trades at nearly 80 times its FY-05 per-share earnings (year ended June). It is not hard to see why. Over the past three years, the company's revenues and earnings have grown at a compound annual growth in excess of 50 per cent. More impressive is that its like-to-like store sales have also registered strong double-digit growth rates. Its relentless expansion, efficient execution and daring experiments with formats, which have paid off in a big way, have not only made it a stock market's favourite, but also given the retail sector a brand new personality.

Expansion drive to continue

Pantaloon is present in value retailing (retail of food and household items) through its Big Bazaar and Food Bazaar stores and lifestyle retailing (stores that retail non-food items) through Pantaloons, Central Mall, aLL, Fashion Station and MeLa formats. With over 20-lakh square feet of retail space, Pantaloon almost dwarfs its competitors. Its early grab for real estate and a presence across formats are reasons why the company has been able to scale up its operations successfully. With Big Bazaar and Food Bazaar, for instance, Pantaloon has been able to enter several tier-II and tier-III cities such as Kanpur, Ghaziabad and Durgapur, destinations that other retailers are only just beginning to look at.

Of the offer proceeds, Pantaloon would spend Rs 40 crore in setting up three Pantaloons and ten Big Bazaars and Food Bazaars by FY-07. It is also earmarking close to Rs 70 crore to fund strategic acquisitions and alliances that would enable it to enter new categories. If it does not find suitable acquisition targets, it would deploy the same towards additional expansion.

While the offer would raise only Rs 225 crore, Pantaloon has mapped out a Rs 500-crore expansion plan over the next two/three years. With its gearing at comfortable levels, it is well-placed to tap debt to fund the rest of its expansion. The management expects to have a retail space in excess of six-million square feet by June 2007, with Big Bazaars and Food Bazaars taking the lead in terms of the number of stores.

Optimising value and lifestyle

In just three years, the contribution of Big Bazaar and Food Bazaar has grown to nearly 60 per cent of the revenues. This bias towards value retailing makes it a volume-driven, low-margin, business. The management however, expects to see a correction in the lifestyle-value mix over the next two years, during which it will add more Pantaloons and Centrals.

Even as the mix of lifestyle stores, which deliver higher margins, and value stores, is likely to be more equitable, Pantaloon will continue its thrust on the foods business, as food and grocery has the largest share of the Indian consumer's wallet. It has recently removed the 30 per cent cap on share of revenues that it had earlier imposed on the foods business.

This would allow the foods business to grow to a scale that would enable it to exert greater pressure on its suppliers. Pantaloon, which sources its cereals and pulses from mills and perishable foods from concessionaries, has now set up a subsidiary — Pantaloon Food Product — to participate in the supply chain, by setting up collection centres, importing fruits and so on.

But the focus on the foods business is unlikely to dampen margins in the near term, as a better contribution from lifestyle retailing would offer a cushion to margins.

Greater chunk of the wallet

While Big Bazaar, Food Bazaar, Pantaloons and Central have become well-known formats, Pantaloon has simultaneously explored new concepts such as aLL, which sells clothes to plus-sized customers and MeLa, which targets home-owners with furniture and home textiles. This is in pursuit of its strategy to sell everything to everybody.

It does not, however, seek to be the Jack of all trades. The joint-venture with Liberty Shoes for footwear retailing, association with Unitech Enterprises for home solutions retailing, and the stake it has acquired in Planet Sports and Galaxy entertainment, reflect its efforts to rope in those with category expertise.

Challenges and risks ahead

Given its ambitious expansion plans, Pantaloon is likely to sustain its first mover advantage. While new stores would drive revenue growth, sustaining customer attention once the novelty of a format wears off is a challenge. Pantaloon, so far, has been able to pull out the rabbit from the hat with all its ventures, simply by learning as it goes along.

While the company has so far demonstrated an ability to capture the pulse of the market, the environment is getting more competitive with ideas being replicated quickly.

It is still early days for some of the newer formats such as MeLa and aLL and the lack of strong customer response to these formats is a big risk to cash flows. So also are its plans to launch a chain of beauty parlours on the one hand and retail communication products on the other.

Pushing private labels, retailers' source of bread and butter, in segments that have been dominated by brands would pose a challenge for its merchandising department. In the thick of competition, the quality and distinctiveness of the merchandise would separate the leader from the rest.

Offer details: Shareholders would be offered one share for every five held. The company would deploy Rs 110 crore towards expansion and acquisitions, Rs 32 crore towards infrastructure and the balance for general corporate purposes. The lead manager is Enam Financial Consultants. The offer closes on January 31.

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