1 December 2009

BSE Sensex: 16926

INDIA RESEARCH
Rs352
Pantaloon Retail OUTPERFORMER

ANNUAL REPORT ANALYSIS Mkt Cap: Rs58bn; US$1.3bn

Analyst: Bhushan Gajaria (91-22-6638 3367; bhushangajaria@idfcsski.com)

Key valuation metrics

Year end June 30 (Rs m) Net Sales yoy chg (%) Net profit EPS (Rs) yoy chg (%) EV / E (x) PER (x)
FY08 50,487 56.0 1,258 7.9 (3.5) 16.8 44.6
FY09 63,416 25.6 1,407 8.1 2.2 13.3 43.6
FY10E 79,345 25.1 2,268 11.6 44.0 11.2 30.3
FY11E 100435 26.6 3,479 17.8 53.4 9.2 19.8

OPERATIONAL HIGHLIGHTS (STANDALONE)

• In FY09, Pantaloon Retail added 1.8m sq. ft of retail space (2.4m sq. ft in FY08) with 9.7m sq. ft of retail space
under operations as of June 2009.
• While rest of the retail industry was in store closure mode, PRIL commendably added 1.8m sq. ft of retail space.
• As of June 2009, PRIL’s retail business comprises 6.2m sq. ft of Big Bazaar format, 0.3m under standalone Food
Bazaar formats, 1.2m sq. ft under Pantaloons, 1.3m of Central and 0.5m under Brand Factory.
• Total number of stores increased from 246 to 273 with addition of 26 new Big Bazaars (116 stores in total), 5
Pantaloons stores (45) and 2 Centrals (9). As a part of consolidation in other formats, PRIL exited some of the
formats and closed down non-profitable stores, thereby rightsizing its presence in other formats from 109 stores in
FY08 to 93 stores in FY09.
Exhibit 1: PRIL – format-wise retail space (m sq. ft)

Big Bazaar Food Bazaar Pantaloons Central Brand Factory Other Formats
10

0
FY07 FY08 FY09
Source: Company Annual Report

• Revenues grew by 25.6% yoy to Rs63.4bn with value retail revenues at Rs45.3bn and lifestyle retail revenues at
Rs17.7bn.

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• During the year, number of footfalls increased by 13.5% to 185.3m, conversion increased from 41.3% to 43%,
average ticket price increased by 5.6% at Rs791.6 and average selling price increased from Rs92.2 in FY08 to
Rs105.1 in FY09.
Exhibit 2: PRIL – performance on operational parameters
Footfalls Conversion

(m) (%)
185
200 44
163 43
43

150 43
115

100 42
41

50 41

0 40
FY07 FY08 FY09 FY07 FY08 FY09

Average ticket size Average selling price

(Rs) 792
750 (Rs)
800 120 105
640 92
86
600 90

400 60

200 30

0 0
FY07 FY08 FY09 FY07 FY08 FY09

Source: Company Annual Report

• Owing to the economic slowdown in FY09, PRIL witnessed a significant slowdown in same store sales growth – for
value retail to 7.4% (10% in FY08) and for lifestyle retail to 6% (10.3%). Nevertheless, the numbers are far ahead of
that for rest of the industry, which witnessed same store sales decline.
• While Pantaloons, the departmental store format, saw sales per sq. ft improving from Rs6,576 in FY08 to Rs6,816
in FY09, sales per sq. ft for Big Bazaar dropped from Rs7,925 to Rs7,412 with a steep decline for Central from
Rs7,817 to Rs6,616 (mall footfalls dropped the most).

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Exhibit 3: Format-wise sales per sq. ft

(Sales/sq.ft). FY08 FY09

7,925 7,817
8,000 7,412
6,576 6,816 6,616

6,000

4,000

2,000

0
Pantaloons Big Bazaar Central
Source: IDFC SSKI Research, Company

• Overall EBITDA margins improved by 140bp to 10.5%. While gross margins dropped by 30bp to 30.1%, PRIL
witnessed substantial savings on overheads like employee cost, advertising cost and lease rentals. Overheads have also
eased as PRIL has cut down on non-profitable formats.
• With value retail share increasing from 71.7% in FY08 to 71.9% and a change in the inventory valuation method,
gross margins have contracted by 30bp. Share of private label brands stood at 18% in FY09.
• As PRIL initiated the staff rationalization process, employee cost to sales ratio has dropped from 5.4% in FY08 to
4.3% in FY09. Staff cost has remained unchanged despite addition of 1.8m sq. ft. This is also partly attributable to
shifting of some back-end functional staff to Future Knowledge.
• Lease rental cost has dropped only marginally from 6.5% of revenues to 6.4%, despite a drop in sales per sq. ft. This
implies that average rentals per sq. ft have dropped substantially.
• PRIL has cut down on its advertising spends while gaining from economics of scale and lower ad rates in FY09.
Total advertising spends have dropped from Rs1.18bn to Rs1.14bn (savings of 50bp)
Exhibit 4: Cost structure
(% of revenues) FY08 FY09 Change bp
COGS 69.6 69.9 29.0
Employee cost 5.4 4.3 (110.4)
Rentals 6.5 6.4 (6.4)
Advertising and selling expenses 2.6 2.0 (56.5)
Manufacturing & other expenses 6.9 6.9 2.3
Source: IDFC SSKI Research

• While EBITDA grew by 45% in FY09, PAT is up by just 12% on the back of higher depreciation and interest costs.
• Depreciation during the year increased sharply from Rs834m in FY08 to Rs1.4bn in FY09. This is largely
attributable to heavy investments made by PRIL into IT Software. PRIL has invested Rs1.6bn during the year on
computer and software, which are subject to a significantly higher rate of depreciation (Rs509m charged as
depreciation on computer and software in the current year as against Rs301.3m in FY08). Depreciation on furniture
and fittings has increased from Rs266m to Rs429m.
• Interest cost increased from Rs2bn to Rs3.2bn on the back of increase in total debt from Rs21.9bn to Rs28.5bn.
Also, the global liquidity crunch of Oct-Dec 2008 drove weighted average cost of debt higher from 11.15% to
11.37%.
• EBITDA to interest ratio declined from 2.48x in FY08 to 2.1x in FY09.

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 IDFC - SSKI INDIA

Outlook: PRIL has lined up calibrated-growth plans in the coming years with focus on Big Bazaar, Food Bazaar,
Pantaloons, Central and Brand Factory. With the ongoing economic recovery, PRIL is expected to add ~4.6m sq. ft of
retail space over FY09-11. This, coupled with sustained same store growth of 8-10%, would help PRIL register 26%
CAGR over FY09-11E. PRIL has more aggressive plans on the lifestyle formats – we expect 6 new Centrals in FY10
(taking the tally up to 15) and 10 Pantaloons (55 stores). The management has indicated its target of increasing sales
per sq. ft to Rs9,000 over the next couple of years. While we expect same store sales growth to drive improvement in
sales per sq. ft, higher growth in Central format (which has lower yield) would restrict sales per sq. ft to Rs8200 by
FY11. Also, we believe that PRIL has very limited scope to curtail, costs from here and thus estimate 40bp of EBITDA
margin erosion to 10.1% in FY11. However, PAT growth is expected to be much better in view of a lower interest cost
burden.

BALANCE SHEET HIGHLIGHTS (STANDALONE)

• PRIL’s balance sheet size increased by 28% from Rs41.1bn in FY08 to Rs52.4bn. Of this, capital employed on the
standalone retail business has increased from Rs35.2bn to Rs42.8bn.
• In FY09, PRIL issued 15.9m Class B equity shares as bonus with differential voting rights (1 share for every 10
shares held).
• PRIL issued 15.1m shares on preferential basis at Rs183/ share, thereby raising Rs2.75bn, of which 11m shares were
to the promoter company – PFH Entertainment. PRIL also issued 5m warrants to promoters and promoter group at
Rs183. Around one-fourth of this amount (Rs229m) was received during the year.
• At the same time, 12.7m warrants issued earlier at Rs500 have lapsed and Rs633m of warrant application money has
been transferred to capital reserve.
• Debt on the books has increased from Rs21.9bn to Rs28.5bn with secured term loan increasing from Rs12.9bn to
Rs17.7bn. Debt equity ratio at the end of FY09 stood at 1.3x (levels similar to in FY08) and Debt to EBITDA has
come down from 4.76x to 4.26x.
• With Rs5bn of funds raised recently through QIP, we expect gearing to drop to 0.9x in FY10.
• Overall gross block addition during the year stood at Rs5bn. While capex towards furniture and fixtures was
Rs1.6bn (1.8m sq. ft of retail expansion), PRIL has invested an incremental Rs1.6bn into computers and software.
This investment is in line with the measures taken for improving inventory management systems.
• PRIL’s investment in subsidiaries and JVs has increased significantly during the year from Rs5.9bn to Rs9.5bn. Of
the incremental Rs3.7bn of investments in subsidiaries, PRIL has invested an additional Rs1.18bn in Home
Solutions Retail, Rs219m in Future Knowledge and Rs823m in Future Generali India Life Insurance.
• PRIL has also invested Rs506m in Goldmohur Design and Apparel Parks and Apollo Design Apparel Parks. This is
towards the investment in JV with NTC for restructuring and development of Apollo Mills and Goldmohur Mills.
Exhibit 5: Investments in subsidiaries/ JVs
(Rs m) FY09 FY08 Increase
Home Solutions Retail 1,654 475 1,179
Future Generali Life Insurance 1,295 472 823
Apollo Design Apparel Parks 669 410 259
Goldmohur Design and Apparel Parks 629 382 247
Future Capital Holdings 595 595 -
Future Generali Insurance (Non life) 561 383 179
Sain Advisory 508 228 281
Future Knowledge 447 228 219
Winner Sports 274 - 274
Others 2,909 2,693 216
Total 9,540 5,865 3,675
Source: Company Annual Report

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 IDFC - SSKI INDIA

• Gross current assets have increased from Rs26.3bn to Rs32.8bn, i.e. per sq. ft gross current assets have increased
from Rs3,338 to Rs3,396. Net Working Capital as of end-FY09 stood at Rs23.7bn, up from Rs19.9bn in FY08. On
per sq. ft basis, net working capital stood at Rs2,453, lower than Rs2,528 in FY08.
• Of the total Rs6.5bn increase in gross current assets, Rs3.6bn is towards inventory. Inventory stood at 103 days and
inventory per sq. ft has increased from Rs1,815 in FY08 to Rs1,850 in FY09.
• With a series of measures taken towards inventory management including moving to Auto Replenishment System,
warehouse management, SKU rightsizing, etc, PRIL targets to bring down the inventory levels from Rs1,850/ sq. ft
to Rs1,600 over the next two years.
• Loans and advances have increased from Rs9.6bn in FY08 to Rs12bn in FY09, including Rs8.16bn of deposits
(Rs7.15bn in FY08) and Rs3.57bn of advances to other-than subsidiaries (Rs1.8bn in FY08).
• Of the total deposits, we estimate ~Rs4.5bn to be towards deposits on existing operational stores (10-11 months of
rentals) and ~Rs3bn towards upcoming stores.
• Creditor days have increased from 35 in FY08 to 46 in FY09.
• Cash on books stood at Rs1.1bn as on 30 June 2009.
Outlook: With leveraged books and lack of external capital, PRIL’s focus for the next two years is on improving its
balance sheet health through deleveraging and operational efficiency. We expect balance sheet size to increase at only
10% CAGR the period vis-à-vis 26% CAGR over FY09-11 with capex per sq. ft expected at Rs1,200 from hereon and
networking capital to drop from Rs2,453 per sq. ft to Rs2,200 by FY11. The deleveraging of balance sheet has already
commenced with the recent fund raise of Rs5bn through QIP bringing down gearing to below 1x. Also, the
management targets to bring down inventory per sq. ft to Rs1,600, which would release ~Rs2.5bn from existing retail
presence of 10m sq. ft. Of the Rs15bn of capex requirement over the next couple of years, we estimate Rs9bn to be cash
profit from operations, Rs5bn already raised through QIP and the remaining through efficiency improvement gains.

OPERATIONAL HIGHLIGHTS (CONSOLIDATED)

• PRIL’s consolidated revenues stood at Rs76.7bn (Rs58.4bn in FY08), pre-tax loss at Rs161m (Rs145m of pre-tax
profits in FY08) and PAT after minority interest of Rs100m (Rs219m in FY08).
• Among the various subsidiaries, key contributors to PRIL’s consolidated revenues are Home Solutions Retail
(contribution of Rs10.7bn), Future Agrovet (Rs3.9bn), Future Logistics (Rs1.9bn), Future Capital Holdings
(Rs1.3bn) and Future e-commerce (Rs1.2bn).
• PRIL’s subsidiaries and Joint Ventures have cumulatively incurred pre-tax losses of Rs2.3bn. Of this, Home
Solutions business has accounted for Rs569m of losses, Future Capital Finmart Services (Future Money) incurred
losses of Rs469m and pre-tax losses in Future e-Commerce stood at Rs284m.
• While Home Solutions business registered Rs364m of EBITDA loss and Rs569m of pre-tax loss, it provided for a
tax write-back of Rs512m. With real estate business witnessing a marked slowdown, Home Solutions business
showed a sharp decline in same store sales in the second half of the year.
• With PRIL’s home solutions business seeing improvement in same store sales and focusing on better merchandise
mix (reduced focus on standalone consumer durable formats), PRIL is expected to turn profitable at the operating
level in the current year.
• Future Logistics has reported revenues of Rs1.9bn and PAT of Rs2.4m. Future Logistics raised USD10m during the
year by placing a 10% stake to Li and Fung, one of the leading logistics service providers. Li and Fung has an option
to further increase its stake to 26% by incremental infusion of USD20m.
• Future Media has reported revenues of Rs462.7m and a pre-tax loss of Rs114.5m. PRIL has scaled down its plans in
Future Media operations, which is expected to achieve breakeven in the current year.

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 IDFC - SSKI INDIA

• Future Generali Insurance (Life and Non-Life) businesses also added Rs340m to the losses while Future Axiom
Telecom accounted for another Rs329m of losses. PRIL has scaled down business operations of Future Axiom
Telecom.

BALANCE SHEET HIGHLIGHTS (CONSOLIDATED)

• PRIL’s consolidated balance sheet size has grown from Rs54.3bn to Rs67.5bn.
• Equity share capital has reduced from Rs1.2bn to Rs1.08bn with Rs200m of preference shares redeemed and
issuance of Rs31.9m of Class B shares.
• Consolidated debt has increased from Rs27.7bn in FY08 to Rs38.6bn in FY09 with overall interest expenses rising
from Rs2.2bn to Rs4.2bn.
• Total gross block has increased from Rs18.8bn to Rs25.9bn and investments have increased from Rs7.3bn to Rs9bn.
• Among the subsidiaries, Future Capital’s balance sheet size is Rs11.4bn (up from Rs9.6bn) and Home Solutions
balance sheet stood at Rs8.2bn.
Exhibit 6: Performance of key subsidiaries
Subsidiary PRIL's stake (%) Revenues (Rs m) PBT (Rs m) PAT (Rs m) Balance sheet size (Rs m)
Future Capital (consolidated) 54.8 1,799 (281.3) (318.2) 11,408
Home Solutions Retail 66.9 10,710 (569.3) (57.3) 8,209
Future Agrovet 96.2 3,923 (42.7) (30.6) 914
Future Logistics 94.2 1,933 9.2 2.4 1,607
Future Brands 76.3 189 4.9 61.5 717
Future Media 84.2 463 (114.5) (76.7) 804
Future Knowledge 100 473 (4.3) 0.7 792
Future Learing & Development 100 55 (1.5) (1.6) 464
Future E-commerce infrastructure 72 1,184 (283.4) (186.8) 721
Winner Sports 100 335 (3.8) (4.1) 809
Source: IDFC SSKi Research, Company

RESTRUCTURING PLANS
• PRIL has announced a three-pronged restructuring plan to effect derisking of the retail balance sheet from non-retail
businesses like Future Generali Insurance, Future Capital, Future Knowledge, Future Brands and Future Learning.
The proposed restructuring is as under:
• Three of the subsidiaries transferred to promoter Group Company: Future Knowledge, Future Learning and
Development, and Future Brands have been transferred to promoter group company – PFH Entertainment. The
transfer has happened at Rs1.9bn as against the total invested capital of Rs900m by PRIL. While Future Brands
owns IPR of all of PRIL’s private label brands, Future Knowledge Services offers back-end services like IT and
call centre to PRIL. Future Learning and Development offers recruitment, induction and training services to
retail personnel.
• Derisking the retail balance sheet from Future Capital and Future Generali: PRIL has announced its plans
to reduce direct investment in Future Capital and Future Generali to ~26%. PRIL plans to transfer its holding
in Future Capital (a 54.75% stake) and Future Generali (49%) into a separate subsidiary, which will be duly
listed. Existing shareholders of PRIL will be issued shares in this holding company. Future Group is also mulling
over plans to merge the insurance business with Future Capital and this would completely derisk the balance
sheet of PRIL’s retail operations from the cash flow requirement of Future Generali Insurance. We believe that
this would be a major positive and would trigger re-rating of PRIL’s retail business operations.
• Transfer of value retail business into 100% subsidiary: PRIL would be transferring its value retail business
into a 100% subsidiary. This subsidiary will own Big Bazaar and Food Bazaar, which currently account for

6
 IDFC - SSKI INDIA

~72% of PRIL’s revenues. PRIL intends to raise funds at the value retail business level and is also reportedly in
talks with global retailers like Carrefour as a strategic partner. Given the fact that these retailers would be quite
keen to participate in the value retail business, the transfer of value retail assets in subsidiary is imminent.
Alternatively, PRIL is also open to raising capital at the value retail level. We believe that while roping in a
strategic partner would be positive for PRIL, transfer of the business for the only purpose of fund raise through
capital market may not be value-accretive as it may attract a holding company discounting at PRIL’s level.
• PRIL has recently raised Rs5bn through issuance of 15.8m shares at Rs316 per share through the QIP route. These
funds bring down the gearing to below 1x and would suffice to fund growth for the next 15 months without any
pressure of raising further debt. We see this as a key positive step towards deleveraging of the balance sheet.

VALUATIONS & VIEW

PRIL continues to be the largest and fastest growing retailer in India with 11m sq. ft of retail space under operations
and 2.5m sq. ft of retail space being added annually. Growth from here, we believe, would be more calibrated as PRIL
focuses on proven and profitable formats like Big Bazaar, Food Bazaar, Pantaloons, Central and Brand Factory. While
we are confident of 26%+ CAGR in revenues over FY09-11, PRIL’s efforts on inventory management (auto
replenishment system, warehouse management system, SKU rightsizing, etc) would help right-size the retail balance
sheet. The demerger of Future Capital and Future Generali business operations would further reduce the pressure on
retail balance sheet. With Rs9bn of cash profit generation, Rs5bn from the recent fund raise and rightsizing of the
balance sheet, PRIL is well placed to deleveraged its balance sheet -- this, we believe, will trigger a re-rating of PRIL’s
retail business. We maintain our Outperformer call on the stock with a price target of Rs402.

Exhibit 7: SoTP based valuations

Basis of valuation Entity valuations (Rs m) Per share value (Rs)
Standalone retail operations 8x EV/E FY11E 81,548 417.7
Home Solutions Capital Employed 1,653 8.5
Future Logistics 90% stake at value attached by Li Fung 4,320 22.1
Future Capital 55% holding - current market cap 8,312 42.6
Other subsidiaries Capital Employed 6,177 31.6
Total entity valuation 102010.5 523
Less net debt - standalone 23443.0 120.1
Equity value 78567.5 402

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 IDFC - SSKI INDIA

Analyst Sector/Industry/Coverage E-mail Tel. +91-22-6638 3300

Pathik Gandotra Head of Research; Financials, Strategy pathik@idfcsski.com 91-22-6638 3304
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Explanation of Ratings:
1. Outperformer: More than 10% to Index
2. Neutral: Within 0-10% to Index
3. Underperformer: Less than 10% to Index
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