Pantaloons: reducing debt

Pantaloons’s operating measures for its core retail business improved in the December quarter, helped by the festival season. Photo: Ramesh Pathania/Mint

Pallavi Pengonda : live Mint :: Sun, Mar 10 2013. 03 36 PM IST

Pantaloons has taken steps to improve its financial health in the past few months by offloading stake in various entities

Pantaloon Retail (India) Ltd (PRIL) announced on Friday after market hours that it has entered into a share purchase agreement (SPA) with Industrial Investment Trust Ltd (IITL) to sell 22.5% stake in Future General India Life Insurance Co. Ltd (FGILICL). The consideration though wasn’t made public. However, according to news reports, the size of the deal is about Rs.300 crore.

It goes without saying that if the company uses the proceeds for debt repayment, it will be a positive given that its high debt has been a major concern for shareholders for a while now. As on 31 December, the company’s total consolidated debt— long-term borrowings plus short-term loans—stood at Rs.5430 crore. This is on a market capitalization of about Rs.4000 crore.

The company has taken steps to improve its financial health in the past few months by offloading stake in various entities and investors were expecting the current news as well, so the development is on expected lines. Interestingly, Future Group, including Pantaloons and Sprint Advisory Services Pvt. Ltd, shall still continue to hold 52% shares in FGILICL after completion of this transaction.

The debt situation is expected to improve. “The company has sold its flagship Pantaloons format and has also exited some of its non-core business. On the back of these moves, we expect PRIL to witness a significant reduction in debt levels to about Rs.3400 crore (FY14E),” ICICI Securities Ltd said in a 26 February note.

Meanwhile, Pantaloons’s operating measures for its core retail business improved in the December quarter, helped by the festival season. The company posted the strongest same-store-sales (SSS) growth in the last six quarters in its lifestyle and value retail segment. SSS growth measures growth based on stores open for at least a year.

Interest costs were flat year-on-year for the December quarter. But, and this is an important but, interest expenses still accounted for 55% of its last quarter’s Ebitda (Rs.285 crore). Ebitda refers to earnings before interest, tax, depreciation and amortization. After depreciation and interest costs, Pantaloons earned Rs.7 crore at the profit before-tax level, which is pathetic on a revenue of Rs.3171 crore.

At Rs.184, the stock trades at about 23 times its estimated earnings for the year to March 2014. So far, since the beginning of 2013, the stock has underperformed the benchmark Sensex. Triggers for the trend to change appear limited.

For one, the operating environment hasn’t seen a dramatic improvement as far as consumer sentiments are concerned. Investors would do well to track whether the improvement in SSS sustains after the festival season as well. Of course, an improvement in its debt position and the resultant savings in interest cost would be helpful. A tie-up with a foreign partner at comparatively higher valuations, if it happens, would be positive, say analysts.