Pantaloon Retail India - Can't get weaker; possible recovery ahead - Prabhudas Lilladher

Sales decline QoQ; SSS growth reaches new low:

Pantaloon's Q2FY12 results reflect the ferocity of pessimism in consumer sentiments which existed during Oct-Dec quarter as it reported QoQ sales decline in a traditionally strong festive quarter (down 0.6%) despite 0.62m sq.ft of space addition QoQ; a rare event. Sales, EBITDA and PAT came in at Rs28.9bn (up 5% YoY), Rs2.6bn (up 9.6%) and Rs135m (down 71%) as against our expectations of Rs30.9bn, Rs2.6bn and Rs343m, respectively. Same-store growth for Lifestyle, Value and Home division was 3.2%, 5.3% and a decline of 3.2%, respectively; a new low. Management attributed the slowdown to 1) Weak consumer sentiments, resulting in postponement of purchases and 2) Poor festive season off-take. Since then, as per management, footfalls, ticket size and conversions have improved driven by heavy discounts and promotions. It expects better performance delivery ahead led by decline in apparel prices and improving consumer sentiments. During Q2, PF added 0.63m sq.ft of space, taking the total retail space to 16.3m sq.ft (up 15% YoY). Standalone entity has reported 8% sales growth with 30bps decline in EBITDA margins and 72% PAT decline YoY.

- Interest cost moves up to 60% of EBITDA: PF's op. margins improved 40bps YoY to 9%, driven by 60bps gross margin expansion which was a result of price increase and minor mix improvement, in our view. Interest costs went up 47% YoY (21% QoQ) to Rs1.58bn and now constitute ~60% of EBITDA. Management has formed a high powered review committee to consider divestments/re-alignments as it felt the need to hasten the “monetization” of non-core assets.

- Cut earnings 30%/32%; maintain Accumulate: We downgrade our earnings 30%/32% for FY12e/13e to incorporate lower sales growth and higher capital costs. However, we expect things to only improve from here (better consumer sentiments will lead the recovery in SSS, in our view) as everything that can go wrong seems to have gone wrong already, leaving little room for incremental disappointment. Maintain 'Accumulate', with revised TP of Rs206 (earlier TP 217). Revival of Multi-Brand Retail and divestment of non-core assets are the key triggers.

Source : Equity Bulls

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