Problem with Pantaloon

Pantaloon's Kishore Biyani rightly said "It happened in India" when the retail supermarkets met its initial success. He is the frontrunner in this industry setting trend, simulating American Retail Business model. But off late, Pantaloon's stock prices have crashed sizably. Though many may think the general weekness in the market is the reason, the problem here is stock specific or sector specific. Let us understand them before taking a call on investing/holding/exiting the stock:

(1) Pantaloon is into multiple business : Retail, Non Banking Financial services and Logistics.
(2) Has more than 50 subsidaries.
(3) Core business is retail super market, with more than 14 million square feet.
(4) Aggressive addition of retail space and stores has significantly increased the debt which stands at Rs.7846 crores, as on 30-Jun-2011.
(4) Interest outgo is about 75% of Earnings before Income Tax (EBIT)
(5) For Sept 2011 quarter results, against an income of 3180 Crores, interest paid was 210 crores and Proft after tax was only Rs.23 Crores.
(6) Same store sales growth is around 3% which is far lower than competitors like shoppers stop who grew 11% on same stores.

Hence the major reason for Pantaloon's share price has been balooning debt and high inventory.

Outlook:
Companies like Pantaloon, who are in retail trade are eagerly looking forward for reforms like allowing foreign investors to increase their stake in Indian companies. Right now, Foreign direct investment (FDI) is limited to 24% stake. Though Government proposed to hike it to 51%, due to hasty handling of situations and upcoming state government elections in Uttarpradesh etc (till March 5th), the proposal has been put in deep freezer.


Pantaloon's recovery, rather lifeline, would be fresh flow of cash to reduce its debt. Though company may raise some money by selling non-core assets, FDI participation is needed. The moment FDI hike happens, stock may shoot up. Hence investors who are willing to take risk and wait for the reforms to take place, can buy this stock at lower price. From a peak of Rs.380, the stock is trading now @ Rs.136.