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Pantaloons Sell Out: Season’s First Sale

Puneesh Garg, Outlook Money

30 May 2012

Following the emergence of modern trade norms in the 1990s, India’s $550 billion to $600 billion retail sector, has been growing at 15 per cent annually. However, in the organised retail sector, which makes up for 8 per cent of overall retail space, the last 6-9 months witnessed a decline in growth.

The recent decision by market leader Pantaloon Retail India (PRIL) to sell its controlling stake in the “Pantaloons store” business to a bigger and deep-pocketed Aditya Birla group—which also runs its own fashion stores like Madura Garments—to reduce its ballooning debt of around Rs. 8,000 crore is only a reflection of the overall retail space. And, this may just be the beginning.

Says Devangshu Dutta, CEO, Third Eyesight, a retail consultancy: "As the margins are thin and operating costs continue to rise, I would expect more retailers looking to sell completely or partly to other business groups and, as and when they are allowed, also to foreign investors.”

Like Dutta, many experts have already started talking about mergers & acquisitions in the post foreign direct investment in retail scenario. A Pricewaterhouse-Coopers’ report, on winning in India’s retail sector, says consolidation is expected as the market dynamics take over to create a more competitive marketplace following the entry of multinational companies. However, it seems that consolidation has started even before foreign companies were allowed to make inroads.

Says Dutta: “The Indian consumer market is in a curious state of mixed development. It is far from being “mature”. The bulk of the market is still addressed by traditional and fragmented retail operations. Yet, there are M&A activities among larger groups, something that is usually seen in highly consolidated and developed markets.”

Ankur Bisen, associate vice-president, Technopak Advisors, a consulting firm, adds: “Many retailers have realised that the strategies of the West can’t be adopted in the Indian context. As organised retail grows there can be more surprising outcomes.” But, what does the Pantaloon-Aditya Birla Group deal mean for listed players? Let’s explore.

PANTALOON INDIA

Soon to be renamed as Future Retail India, PRIL has come a long way since it launched its fi rst “Pantaloons format” in Kolkata in 1997. Over the years, it had become the leading fashion retail format in India with 65 stores, a combined retail space of around 2 million sqft and a turnover of around Rs. 1,700 crore, Pantaloons is set to hand this fl agship format division to India’s prominent conglomerate, Aditya Birla Nuvo (ABNL). On the face of it, the deal looks positive as the Biyani’s will be able to reduce around Rs. 1,600 crore debt by demerging 2 million sqft of the total 16.3 million retail space. Says Ankur: “Though PRIL started as the fashion retailer, over the years it added another format and now Pantaloons is just a small part of it”.

However, Pantaloons was the most profi table division in terms of margins. While retaining part ownership and management of Pantaloons, the Biyanis will focus on the food & grocery and value-apparel formats — Fashion at Big Bazaar and Brand Factory. Incidentally, ABNL’s More competes with Biyani’s Big Bazaar. PRIL also wants to sell stakes in Future Capital Holdings and insurance business to raise funds and pare down its debt further. While retail consultants feel that by reducing debt, PRIL’s focus on the FMCG space can take it to higher trajectories in the medium term.

Speaking on the condition of anonymity, an analyst tracking the company, says: “Though the company has managed to reduce around Rs. 1,600 crore of debt, and may further pare it down by selling stakes in its non-core businesses, it will be left with low-margin business. Besides, it is facing slowdown on operational fronts too, the same store sales growth has not been encouraging for the last 6-9 months”. Therefore, the stock may be de-rated once the deal goes through.

ADITYA BIRLA NUVO

Biyanis selling out to Birlas may not be cheered by Pantaloons’ investors, but participants say, it will give ABNL the much-needed opportunity to expand its own brands such as Louis Philippe, Van Heusen, Allen Solly and Peter England from Madura Fashion & Lifestyle. This will also catapult ABNL to the pole position in the branded fashion space. With a pan-India presence, ABNL is a $4 billion conglomerate with interests across sectors—from financial services and telecom to fashion and lifestyle. Since fashion and lifestyle forms 12 per cent of the group (before the Pantaloons buy), valuing the company based on its retail presence is a difficult task. So, investing in its retail business is ill advised for now.

OTHER RETAIL STOCKS

With around 3.1 million sqft of retail space, Shoppers Stop is yet another pioneer in the organised retail space in India. It is predominantly present in tier 1 and tier 2 cities. It has presence in value retailing through the Hypercity chain of stores. The company’s consolidated revenues and profits were Rs. 2,505 crore and Rs. 43 crore, respectively, in FY12. At this price, the stock trades at 1.12 times its sales.

Similarly, Trent, a Tata enterprise, is also a fashion-cum-food and merchandise retailer. The company has 61 Westside stores. The latest annual results said the company earned a meagre Rs. 7 crore on sales of Rs. 1,700 crore, resulting in a price-to-sales ratio of 1.40. This is pretty high compared to PRIL and US major Walmart which trades at 0.28 times and 0.45 times, respectively.

Then there are other retail chains forming a small part of bigger group companies—Reliance Trends owned by Reliance Industries and Spencer’s by RP-Sanjeev Goenka Group—that have also failed to make profits from their retail businesses.

One would have made huge money in Pantaloons 10 years ago, as the Indian economy was connecting with the world and organised retail was making inroads. Says Charles Munger: “When you’re an early bird, there’s a model that I call "surfing"—when a surfer catches the wave and stays there, he can go a long, long way.”

Pantaloons was the surfer in the great retail wave and has been rewarded well. However, since 2006 a Pantaloons investor have not gained much at a time the markets rose around 57 per cent. The Shopper Stop and Trent stocks also moved along the same way. Apart from low margins, the retail sector is also facing a number of bottlenecks on the policy front. The goods and services tax (GST), which was to be implemented in April 2012, remains in suspension and the ector has not been given industry status. Says Ankur: “Organised retail, despite limitations, will grow leaps and bounds in the next decade. There will be many surprises along the way as companies discover the right Indian model of retailing”

So, investors must wait till the retail sector gets its turn. Invest only if you find deep discount on these stocks, similar to the discounted merchandise at retail stores.

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